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Ladies and gentlemen, good day, and welcome to Birlasoft Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Vikas Jadhav, Head, Investor Relations, Birlasoft Limited. Thank you, and over to you, Mr. Jadhav.
Thanks, Neil. I'm Vikas. Good evening to everybody. I'm Vikas from IR. And joining us today on this call, we have our CEO and MD, Mr. Dharmender Kapoor, DK; CFO, Chandrasekar Thyagarajan; Roop Singh, our Chief Business Officer; Shreeranganath Kulkarni is our Chief Delivery Officer; and Arun Rao is our Chief Business Officer.We will begin this call with opening remarks from DK, followed by Chandra and then move to the Q&A session.Please note that anything that we say on this call and refer to the company's outlook for the future is a forward-looking statement, and as you read in conjunction with the disclaimer, which were mentioned in our Q2 Investor Day, which has been updated -- uploaded on the stock exchanges.I'll now hand over this call to DK. Over to you, DK.
Thank you, Vikas. Good evening, and welcome to Birlasoft’s second quarter financial year 2022 earnings call. I sincerely hope you all are keeping well and doing well with your respective businesses.Let me provide some color to our quarterly performance. Quarter 2 revenue was at $136.9 million, which is up 6.7% quarter-on-quarter and up 18.4% year-on-year. The revenue growth momentum has improved significantly in the past 4 quarters and has comped a CQGR of 4.3%, which is quite encouraging. Our commitment to create an organization that is predictable and sustainable [indiscernible] and as we go quarter-to-quarter consecutively for fourth quarter, the deal win momentum continues to be good, and we have won key TCV deals of $140 million this quarter, of which $104 million came from new business. The share of digital deals and transformation programs are increasing post COVID. The clients are also pushing for deal structure that is modular in nature, and hence, that would mean there will be a series of smaller deals than monolithic large deals. This has led to increase in the ACV revenue, which is apparent through quarter-on-quarter growth that we are showing, but it will provide lesser or a delayed visibility to PCV revenue. Hence, the PCV wins may not look as large as we have done in the past. After getting a good pickup in the net new business in quarter 1, this quarter are a significant jump to the net new business, which contributed to approximately 37% of the total wins versus 13% in quarter 1. In fact, it is a multimillion dollar deal this quarter, including TCV [ $320 million ] large deal were from the new clients. The increase in net new business clear result due to many clients opening up for discussion and ready to meet face-to-face as part of the evaluation process. In fact, I personally spent a couple of weeks in U.S. in the month of August and a couple of weeks in Europe in the month of September. And I could clearly see openness to invest in emerging demand and opportunity. And that is what is demonstrated through the quarter 1 net new wins that we are showing. Most importantly, the quarter growth was very broad-based across all verticals and horizontals. As you may have seen from reported quarter 2 wins, there is a good increase in the Enterprise Solution deals, and these are across upgrade, new implementation and transformation deals. Enterprise Solutions grew 1% quarter-on-quarter. Cloud & Base Services has shown significant growth and have grown 19.1% quarter-on-quarter and 51.8% year-on-year. Similarly, the Business & Technology Transformation side growth of 6.2% quarter-on-quarter and 29.2% year-on-year. We are more optimistic today in almost every segment of technology than we were about 6 months back, which also is demonstrated in 50% increase in our deal pipeline. Even on the vertical side, we saw all around growth. Our focused verticals like BSFI and Lifesciences have grown 10% plus quarter-on-quarter and approximately 15% on a year-to-year basis. Manufacturing grew 4.9% quarter-on-quarter and 21.8% year-on-year. Even E&U, which saw subdued growth last year due to factor of like oil prices, with crude oil pricing stabilizing at higher level now, we are seeing good pickup in E&U vertical as well, and it grew 12% year-on-year. Growth also continues to be driven by large customers with top 10 and top 20 clients, revenue growing over 8% quarter-on-quarter and over 21% on a year-on-year basis.Although there was a marginal decline in the active customer account from 291 to 280, the revenue growth from ex top 20 customers was also up 4.7% quarter-on-quarter and 10.8% year-on-year. Our customer account of $10 million plus, revenue improved by 2 this quarter, 3 in year-on-year basis, bearing the testimony to our mining and cross-selling efforts and focus on top customers. EBITDA is absolutely -- sorry, EBITDA in absolute terms was flat at $20.5 million quarter-on-quarter. And EBITDA margin for quarter 2 was up from 13.9% in quarter 2 financial year '21 to 15% in quarter 2 financial year '22, while it saw a drop of 98 bps quarter-on-quarter.Margin was affected due to wage hike, increase in the subcontractors’ expenses and investments. Despite a significant pickup in accretion seen across the sector and across the industry, we managed to improve our utilization marginally to 85.8% in quarter 2 from 85% in quarter 1 and 83.7% in quarter 2 of the financial year '21.PAT stood at $14 million versus $15.4 million in quarter 1. PAT was down primarily due to lower ForEx gain in quarter 2 versus quarter 1. The manpower head count at the end of quarter 2 stood at 12,065 and saw an addition of 557 professionals quarter-on-quarter and 2,055 on a year-on-year basis. The attrition is a cause of concern definitely and our Q2 LTM attrition stood at 24%, which is the highest ‘til date mark in the [indiscernible]. However, I believe that the [ cellular attrition ] is due to pent-up demand and pent-up attrition, which hopefully, should soften in about 1 to 2 quarters, and we should see that the attrition will soften in next 90 days to 180 days. As fresher get into the billable roles and travel opens up, we expect attrition to taper down in the next couple of quarters. We have added over 430 freshers in actual roles. As far as work from office is concerned, our leadership team have been working from office for the past couple of months. We have also started to broaden our presence through work from office. However, we clearly know that we will have to adopt hybrid work environment and will have to provide roles with flexibility for our people to work from office, home or client locations. Birlasoft continues to get various recognition. It was named a Top 15 Sourcing Standout by ISG, and among the leading providers in the Booming 15 category globally as well as for the Americas region based on annual contracted value won over the last 12 months. This is the sixth consecutive time that Birlasoft has been featured across named categories by ISG. The company was also named a leader in SAP S/4HANA, system transformation. It achieved service expertise in JD Edwards applications through Oracle Cloud and Oracle E-Business Suite applications to Oracle Cloud. Furthermore, Birlasoft was named a finalist of 2021 Microsoft Partner of the Year Awards in the Applications Modernization category. In quarter 2, we also announced a strategic partnership with Freshworks Inc. to help global enterprises nurture and supplement their digital transformation programs by delivering enhanced customer experience management services.To conclude, the demand environment remains robust. Though some supply side challenges are likely to continue in the near term, we remain quite optimistic with the order booking, the pipeline and the [ partiality ] for growth.With this, I would like to hand over the call to Chandru for providing more details on our financials. Over to you, Chandru.
Thank you, DK. Good evening, everyone. Let me take you through some of the financial highlights for the second quarter of FY '22. Our revenue was $136.9 million versus $128.4 million in the previous quarter and that’s up 6.7% quarter-on-quarter and 18.4% year-on-year. The cross-currency headwind of 47 basis points, therefore, the revenue growth in constant currency terms was 7.2%. In rupee terms, revenue crossed the INR 1,000 crore mark and stood at INR 1,012 crores, which was up 7% quarter-on-quarter and 18% on a year-on-year basis. The EBITDA for the second quarter was at $20.5 million, flat quarter-on-quarter and up 27.5% year-on-year. In rupee terms, our Q2 EBITDA was at INR 151.8 crores versus INR 151.1 crores, marginally up by 0.5%. Our EBITDA margin was at 15%, up 107 basis points year-on-year, but down 98 basis points quarter-on-quarter. The impact on margin came from wage inflation. We had wage inflation in action. We had some increase in our subcontractor expenses. We also had some investments, strategic investments that we made in the second quarter, margin percent by volume growth and operational efficiencies that we continue to push. Our PAT for the second quarter was $14 million versus $15.4 million in Q1. PAT was lower in the second quarter due to lower other income, which were down from $2.9 million in the first quarter to $1.3 million in the second quarter. And that's primarily because at the quarter end, the rate of the INR to U.S. dollar was almost flat in the second quarter versus a [ capitalization ] of about 1.7% that we saw in the first quarter over the fourth quarter of FY '21. Therefore, this is why in Q2 FY '22, there was a revaluation gain versus only a very marginal gain in Q1, and that led to a lower ForEx gain in Q2 of about $1.5 million, which explains the reduction in PAT on quarter-on-quarter basis.DSO, we continue to do well in our collection and our DSO. We -- our DSO stood at 54 days, which is flat on a quarter-on-quarter basis. However, we improved 4 days on a year-on-year basis, and that's the lowest to date that we've done.Our cash and cash equivalents stood at $144.6 million, which is INR 1,073.6 crores as of September 30, 2021, versus $154 million on 30th of June, 2021. Cash was up $20.3 million on a year-on-year basis. The quarter-on-quarter cash was down primarily on account of the dividend payout and also additional working capital resulting from the growth in our business. CapEx for the year -- for the quarter, sorry, was $2.4 million. And all of this, primarily on IT assets that we had to procure to support the growth that we've had. The Board announced an interim dividend of INR 1.50 per share, and it's an increase of 50% over the prior year interim dividend. Overall, the financial metrics remain stable, and we continue to strive to better them on an ongoing basis.With that, let me throw the floor open for questions. Thank you.
[Operator Instructions] The first question is from the line of Baidik Sarkar from Unifi Capital.
Congrats on a very strong headline number. A couple of questions. Your Cloud & Base business seems to have broken out very well this quarter of about 20% sequentially. Could you perhaps flesh out this practice line for us and the ISVs that are moving this number? How do you see this pan out? And importantly, how much of this is project versus annuity-based to date?
I'm sorry, Baidik, if I understood the question right, we said that we have grown well on the Cloud & Base Services. You want me to elaborate on that, right?
Yes. If you could just flesh out the ISVs that are moving this for us? And how do you see this panning out? And importantly, how much of this practice line is annuity versus project based? Yes.
Okay. Excellent. So I would give the data of the breakup between the NOT and the project base, just for that segment, I probably will not have it very handy, but we can provide you that data. But I think that definitely stands over to 70% at the overall portfolio, which is what we have been maintaining because the deal structures are changing. I was really hoping that from 70%, we start moving up, which will happen eventually, but if you look at during this time, the H1, a lot of deals that are coming are the ones which are pent-up demand because these are the transformational programs that have been there. That was stopped last year, and they have started in this particular year, so from that and particularly if you look at are coming in the current year than usual because the clients are trying to catch up with the projects that they had stopped earlier or had put on the slow burner. Second, when it comes to the cloud revenue, for us the cloud revenue has started improving because you would have noticed that we have had our partnerships especially with Microsoft, with AWS, with Google. Okay? We have switched that partnership in place. And there is a significant interest that we are seeing in the application modernization category. Because that is real. Right now, there is a significant return that is there. A lot of clients who thought that they should move to cloud at some point of time, because of pandemic base, thinks that they were better off if they had moved it out already. So now they are in a hurry to make the move to the cloud for their critical infrastructure and applications so that in case anybody will have to work on any location, it becomes much more easier for them to do that. So that is, I think, bringing up some advantage in that category also. So from that perspective, I believe that there is a good momentum that we have started capturing on the cloud side because that's what was our plan while we were switching these partnerships.
Sure. And we can now have the wage hike quarters behind us and given the pricing environment in industry, would you reckon we’ll revert back to a 15% spread margin sooner than later?
That's the plan, absolutely. And I really wish that the attrition was not as strong as everyone has since seen in the last 2 quarters. But I continue to maintain my view on the attrition that it is going to start softening by this quarter, and it will soften to a good extent by end of the next quarter. I know these are the opinions. Many others have the opinion that no, it’s going to stay for long. I believe some level of attrition will stay for longer. But I think it will soften by quarter 4 and because the pent-up demand will have gone already. At the same time, the better attrition would have also softened. So that means the bubble that we are seeing in which people are moving from one company to another company, that will be -- that will burst and probably it will soften. So yes, that is the plan because our goal is definitely that we deliver the EBITDA and EBIT at par with the industry, and we want to continue to move towards that. And you're absolutely right that the salary hike is behind us. We continue to look at how do we make the talent supply chain effective. That is what we have been doing in the last 2 quarters. But generally, when we bring in the freshers, it takes 2 to 3 quarters before it actually develops. I believe that it should start showing at the results on that front now, and we will see some advantage coming in.
The next question is from the line of Sandip Agarwal from Edelweiss.
Congrats, DK, again for the excellent execution this quarter. So DK, I have one question on the order book. What we understand from the industry experts and when we speak to a lot of consultants is that the demand is extremely strong, and you have delivered a good set of numbers, no denial on that. But the order book, it still doesn't reflect that. Is it that you are not intentionally taking some of the clients or you’re saying no to [ clients ] because either the pricing is not matching up to your expectation or your aspirational situation is such that you don't want to get into a situation where we can have some execution challenges? Is it the reason? Or you -- or is there some other reason why our order book is not as strong as it should reflect the way demand situation is and the way the [ attrition ] is showing up? So any idea on that front would be...
No. No, absolutely. It's good that you asked that question because the way we look at generally the order book cost is that even when we show the TCV or ACV and all that, we generally show the deals that we win in a composite manner, okay, either in the form of the project or in the form of a deal, that is what we count in the form of wins. But then there are other things that we continue to grow our revenue on, which is many of the time and material engagements where there is some change in cost that comes into the play, or we grow our existing running engagement by adding some resources on top of that. We really don't count that into the TCV and ACV because if you start counting that, then there are so many [small much] more things that you need to put together. While those [ small much ] things can put together, do look good revenue also, but that is not what we count in our order book, because then it becomes very difficult to start tracking for that. I think the way we have to look at is that the order book should be a clear reflection into the quarterly revenue that we make. And when I look at from that perspective, I think it is sounding very, very good for us because we are able to grow in both quarter 1 and quarter 2, much more than that we planned internally as our own goal. At the same time, in comparison also in the industry, we have shown good growth in the quarter 2. So if I look at my order book, if I look at the number of wins, and I look at my deal pipeline, I am very confident that we are capturing the momentum in a very, very handsome way. There -- where we sometimes do [indiscernible], these are the deals where we believe that, one, that either the price is way too low, or we believe that the scope is being defined in such a way that there will be effort overrun, there will be costs overrun. So you may win, actually the contract is in place, but we are going to bleed very, very quickly in that particular engagement. So we have started evaluating and started doing [indiscernible] analysis far more carefully. So that is there. But I don't have a figure that I can quickly give it to you that how much is that plan we’ll do. But then there are a few things that we definitely say no.
If you can further develop that answer, but a follow-up on that, the way we look at that, and we have limited information, and as you rightly mentioned, that you have far more information than us, but we can only compare the numbers quarter-on-quarter. And when we do that, then it looks like there's a little more momentum on the deal wins compared to the industry demand. I take your point that the actual quarter growth is very good and you seem to be very confident. So will it not be fair on your part to guide us something at least on the long-term basis, which you have been guiding? So if you can replace what is your thought process given you have now seen 2 quarters of this year, and you have good order book and you have some visibility into next year. So what should we build in from a 2-, 3-year perspective on overall business? Where do you see we will touch the revenues, including inorganic/organic growth? And where do you see the [ confirmed ] margins to be? Any idea on that front will be very helpful because otherwise, it becomes very difficult because there are so many things which, as you rightly said, are not disclosed for the client consolidation as a result. So if you can...
Correct. I think it's a fair question. The intent is not for us to share those things. The intent is to provide the right information, and I'll give you one example. I did talk in my opening statement, also, one is looking at the TCV number, second is looking at the ACV number. Third is looking at the new business. So if you look after the big TCV, how much is a new business, and how much is the repeat business? Because the repeated business doesn't give you an incremental revenue. In no time, one can show that whilst TCV PC is higher, but if you repeat -- if it is consistent of mostly repeat business and you have done renewals, that means there is no incremental revenue that you're going to get. If you look at the ACV last quarter and this quarter, we have significantly improved on the net business, net new business, okay? On 2 things. That is where the new business that is from our existing clients and the other that is coming from the new clients. It has significantly improved. Okay? That gives me the confidence that my ACV is getting better, my new business is getting better, my net new or new cohorts are getting better. There is no reason why I would not go and demonstrate better quarter-on-quarter growth. However, it's much -- basically, [ much ] higher, whereas [indiscernible] are also very higher. Then there could be a concern that it is a retail business that I'm showing that again and not really the new business that I'm showing it again. So I think that was the difference in the numbers that comes into the wins. I am very confident because the new business that we are winning have started to improve a lot. And the net new wins have significantly improved in quarter-over-quarter. Last year, if you look at, it was very low because no client was meeting. But we picked up this momentum in the quarter 1 and quarter 2 to start meeting our clients in U.S., in Europe, in India every year, and that has started to see that we have started closing new deals. Now these new deals be -- a lot of time will start small and will grow bigger over a period of time for simple reason that whenever there are digital deals that are coming, to begin with, it is a smaller deal. The second one will be even bigger. The third one will be much longer because it actually results into support and maintenance, annuity revenue in [ our homes ]. So we have to understand the mature of the digital deal, which is very different from the Enterprise Solutions deals.
Okay. That's helpful. So sir, when do you expect to touch $1 billion revenue?
March 2025, we will be $1 billion.
Okay. And that’s a very...
Yes, that goal remains. And we said that we want to touch 18% EBITDA at that point of time.
The next question is from the line of Mohit Jain from Anand Rathi.
Sir, one more on the Enterprise Solutions side. So that service line was less on the weaker side. What should we expect this going forward? That's one. And second one, there was this bump in other expenses from a quarter-on-quarter perspective. So what kind of expenses were these and what happened during the quarter?
I'm sorry, just repeat what -- just repeat the second part of the question?
There was a bump of other expenses on a quarter-on-quarter basis. So was there a onetime cost or something which you guys took in this particular quarter? Or should we expect that as the new other expenses in the future?
Yes. I’ll give the answer to the first question, and I would request Chandru to provide the answer for the second one -- second part of your question. On the Enterprise Solutions, the good news is that we have started seeing the growth. Okay? In fact, in this quarter, there is no part of the business that has now grown. Every single part of the business has shown positive growth, which is very good, actually, because whether it's a geo or whether it’s a vertical or a horizontal, everywhere, we have shown the growth. And I'm very happy that the transformation deals have started to come by because last year, we saw that there was a dip in that. And this year, we are seeing that it has started to improve upon. At the same time, we defined our strategy clearly very well that we need to have our channel sales strategy to be positioned in a different manner so that it can continue to focus on net new business under Enterprise Solutions by working along with the OEMs, and that has started to show up the benefit, so that is also very encouraging. So from the Enterprise Solutions perspective, I believe that we have started doing very well, and we have grown positive in this particular quarter. That is going to happen the same thing going forward and you see better pipeline than before. So that is one way of looking at it. Second way of looking at it was as the organizations are planning their digital journey, they are realizing that they may also have to transform their enterprise solutions also, such as SAP, Oracle, okay, or JD Edwards. They will have to transform that after because sometimes you are not able to get the real advantage if your processes behind that are not strong enough and agile enough. And hence, we have started seeing the deals which are to transform or improve or upgrade the enterprise solution so that the clients can give a digital layer on top of that. So those kind of deals are also giving the flip to the revenue that will come into the Enterprise Solutions. So looking at this point, and when I look back that we kept our strategy around enterprise digital, that digital model sits on top of the core solutions such as SAP or Oracle, JD, Inva, ServiceNow or Salesforce, that is coming to be true because clients are realizing that the entire data [ mill ] is in the transaction processing system, which is the ERP. They have to implement the digital they need to defend for the data that is below that layer. And that has started to give us the advantage. And I believe that we will be actually winner by having that standing in place and having ourselves pretty much balanced between Enterprise Solutions and digital.Chandru, over to you for the second part of the question, which was a discussion on the other expenses.
Sure. Thanks, DK. So the other expenses, this is where the contractor expenses actually get included in. And I talked about in my opening remarks, the increase in the contractor expense on a quarter-to-quarter basis that added to our cost in the first quarter refers to -- this was to meet the demand and also relate to the [ competition channel ] that we've had this past quarter. So that's the primary driver for the increase in the quarter-to-quarter basis, and we expect that really, as the -- as travel opens up, as the talent supply situation improves and the attrition situation improves, we expect to bring that back into [ an increased share] .
Okay. And sir, a follow-up. Like you were talking about the smaller deals, smaller 1 million, 5 million clients were a little on the lower side for us, specifically during the quarter, also over the last 2, 3 quarters. So what is causing this movement? And how do you expect the scale-up to happen and it your [ corporation ] deal size or smaller deals compared to the [indiscernible]?
Sorry, what was the question?
So the 1 million and 5 million clients, that bucket was at the lower side, if you look at addition over the last 12 months or so. Why the deals are becoming smaller, and therefore, some of it is not getting captured in the GP. So how do we -- what is the expectation there from a smaller client addition perspective?
Well, I think our -- actually, the larger, these higher $10 million have started to improve. So some of the them are seeing the movement also. At the same time, we are also looking at that many of $1 million, these are generally projects. Okay? We still have a significant 25% to 30% of our revenue coming from the non-annuity business, which is a project-based business. So that means that we have to continue to work in order to win more good projects. So there will always be some quarterly mitigation that will happen. But so far, we are continuing to show the growth, which is much above the target that we see for ourselves on quarter-on-quarter growth. I don't think that should be a concern because most of these things are generally the 1, 2 projects, and we continue to make an attempt that when the project is finished, we continue to win more projects with the customers. So sometimes, there will be variation from quarter-to-quarter. And that is especially going to be in the category of 1 million.
The next question is from the line of Shradha from Asian Market Securities.
Congratulations to the management team on a very strong execution. Sir, I just wanted to say that you have indicated us a double-digit growth in FY '22. Now, with a very strong Q2, do you think at least a 15% growth is what you can easily come back to?
So absolutely, I think that continues being our goal, that we should show 15%. And 15%, that has been our service. So I'm pretty confident that we will be able to achieve that. Though don't read that as a guidance from my side, but we are definitely very confident.
Sure, sir. And do we also see some impact of furloughs in 3Q? Or would 3Q also be a very strong quarter for us?
So it is a very interesting thing that we want to see how it pans out in the current quarter. For 1 customer, we have heard that they may plan to have furlough. But we are also trying to really look at, to work out that on one side, there is a pressure from our clients on getting them the resources and having a quicker time to market; on the other side, why there should be a furlough. So we are trying to really look at that. If any such case is coming, we go and negotiate with the client, that how can you cover up without really getting any furlough impact in the month of December. So we are having the discussions there with our clients. So far, it is not looking to be a big impact so far. But generally, I have seen that there are always a couple of clients who will bring the surprise only at the last moment. But then, we are already in touch with those cases where we think that their supply can come, and we're trying to mitigate that risk.
Right, sir. And then secondly, on margins, despite a very strong 1Q, we had indicated that our full year margins would be 15%. And now in first half, our margins are already at 15.5%. And we have said that we would like to build some cushion because of supply side challenges. Now with first half margins already at 15.5% and challenges in the quarter are out of the way, so did you see margin improvement going into the second half? And then how should we look at full year margins?
To be -- I think the biggest focus that the organization today have is to address the margins because when you are looking at the margin, that means that you have to look at many of the parameters in parallel to that, the talent supply chain, the reduction of the fresher, forward-looking at reducing the cost of resource, forward-looking delivery cost, so we’re going and trying to negotiate better prices with the client or even trying to go and [ negotiate with ] the client. So there are multiple initiatives that we have started in that direction so that we can address the margin because that is the key focus right now. I think the growth, we are far more confident today based on the structure that we have created with respect to our sales as well as our large deals. So now that we are very confident on that, we have to really look at how do we address our margin also because in the near term, where, of course, everybody is getting hit with this, the whole attrition and other things, but there is a way to address it, and we are already working on that direction.
So directionally, how do we look at 3Q margin, sir? Should it [indiscernible]?
I think it should be positive. We should move positively in the quarter.
Sure. And sir, just one last one, just keeping question in the segmental margin rate that we have provided as to the Manufacturing margin being down almost 400 bps on a sequential basis. Anything particular we might want to comment here?
No, I -- just repeat that question again, Shradha.
Sir, segmental margins for Manufacturing business segment is down almost 400 bps on a sequential basis.
Yes. So if you look at that, when we talk about the Manufacturing and all that, that is where we are yet to get the real price advantage. In all these cases where we started negotiating the better prices, I think that has started happening in Manufacturing, we are a little bit or trying to achieve that. So I believe that we should be able to pretty much catch up with Manufacturing also during the [ sign ]. At the same time, if you look at every single industry, manufacturing is 1 industry which is far more cost efficiency focused themselves. Okay? So from their side, you will always see the price increase lower than the other industries such as Lifesciences or BFSI because they are far more growth-oriented industries. It comes with the technology. So I think it will be nature of the industry that the speed, you will see the differences.
That's helpful. And just one question, if I can. Sir, I mean, was there any revenue we could not capture in the quarter because of fulfillment issue?
No, I don't think so. I think we have been really working very hard on really hiring and everything. I do believe while we’re -- and I'm sure there will be some time in the period of engagement where there could be something in the captive buy, where we may not have captured some part, but it is going to be very insignificant.
The next question is from the line of [ Sandeep Shah ] from [ Global Securities ].
Congrats on the good results. DK, just wanted to understand, looking at the attrition spike and that too on an ATM basis, which is one of the highest in industry for any company. So on a quarterly annualized, the attrition could have been at a much higher level in the quarter. Despite that, the absolute employee cost on a Q-on-Q basis has gone up by just 3.7% despite rate hike. So whether the rate hike has been equated for part of the quarter or it has come for all the 3 months for the Q2 and may not repeat going forward? That's the question number one.
Okay. So we did that from the month of August. So what you have seen the impact is for August and September in the quarter 2.
Okay. Okay. Okay. And you believe if any further hikes are possible going forward to control the attrition or taking down the hike in the Q3 fiscal?
No, it is not going to be -- there will not be a hike across the board. Now everybody knows who deals with IT, as soon as there are always going to be selective cases where you may have to have some retention and are getting the -- will keep the retention as long-term incentive rather than just scaling the hike for the people because just changing the salary structure has far bigger consequences. So we try to address it through the long-term incentive that we provide in order for us to [ derestriction ].
Okay. Okay. And despite 1 month of deal hike spending in Q3 or lost being there plus maybe some selective retention measures you are taking, you are saying Q3/Q4 margin will be better than Q2? Or you are saying it will be in the similar range as it was? Because for Q2 on, we are talking about flattish margins, but we did not achieve.
Correct, correct, correct. And I mean, we didn't know that quarter 2 attrition is going to be far higher than the quarter 1. Okay? Nobody thought about it, but that's how, then we started facing it. And it only started to become stronger when the talk was happening that there will be a back-to-office strategy that everybody put in place, which is not yet put in place. So the plan that we are working on that we have identified the levers that we need to address in order for us to improve the margin quarter-on-quarter. But then there are always some of the surprises that can happen. But if I look at the attrition, okay, for the last now 1 month, it is more flattish. And in some cases, it is a little bit of less rather than it is picking up the pace. So if I look at from that perspective, I believe that there will not be a big surprise. There is 1 surprise that’s definitely there that the furlough can happen with our clients. Now that surprise is there. So far, it looks like that we'll be able to address it. I think if we are able to address these couple of challenges, then, in my opinion, we will show some improvement in our margins.
Okay. Okay. And, DK, you worry about high attrition impacting your delivery capability, execution capability, demand component issue in the Q4? Or do you still believe those won’t be a problem to look for in the future?
You are saying that whether demand fulfillment and all that will be problem in the future or not?
Yes, because of acquisition being so high, there could be some [indiscernible] particular contracts where we cannot replace the employees so easily and that can impact your project ramp up by maybe a few months as a whole. So will it impact the sales ramp-up in Q3, Q4?
Correct. So first of all, just let me explain that it is not an issue of just time and material. At that site, client can put a finger on someone, and we couldn’t experience in the demand similar kind of profile. But you can always negotiate with the client. That is one thing. Second, in the fixed price, just because I can go and put a junior person without discussing that with the client doesn't mean that I can do so because at the end, I'm responsible for the execution and delivery. And if I bring the people who are not able to deliver it, it doesn't matter how low the cost is, I may get into effort overrun, and that would mean that I may have lower cost in forces, but because of the effort overrun, I may still end up spending the same amount of money. Okay? So both the sides have the issues. What I believe is that the nature of the work going forward is not going to change significantly. The digital deals are going to be there. Enterprise Solution deals are going to be there. The -- some level of momentum will remain. Okay? Probably the pent-up demand is going to go down, but the rest of the momentum is going to remain. So there is going to be definitely an attempt that how do we get the supply chain right by start bringing the pressure, take a little bit of hit in the shorter term. But in the medium term to longer term, we create an engine that can fulfill within rather than always depending upon the external parties or external market. That is what we are working on. And on the shorter term, I believe that most of the companies will continue to face a challenge. But I think everybody will work towards finding a solution. I believe for IT industry, if we ignore the short-term challenge that is there, I think we are in a good situation because it is going to create a model that was long awaited. And will probably create an environment of hybrid work at the same time being able to create more methods of creating the talent, whether it is in India or it is in the Eastern Europe or it is in America authorities, in the Philippines, there are also the things that we have started to make so that we can broad base, we can [indiscernible] 2 for the high gains.
And the last question is just on the Enterprise Solution. This used to be a [ little ] buffer for the right reason. But as you are seeing, most of the demand deal wins are happening on [indiscernible] and upgrading. Do you believe the worst is over and the Enterprise Solution, the 41% revenue contribution may have some further upside rather than the downside going forward?
Yes. I believe, definitely so that the Enterprise Solution will show positive movement now for simple reason that the clients have started to understand that they need to also strengthen their [ negative ] platform. And hence, they have started to invest back into growth for some while. So I definitely believe that this area will continue to give us very good growth and good part of our revenue will continue to come from the Enterprise Solutions also.
The next question is from the line of Abhishek from Incred Capital.
Congrats on a great execution. The first question is on the sales and support employees. I mean, we've been just ramping up that number significantly over the past 4 quarters. When could we see that reflecting in our higher bookings number? That is the first question. And second, I may have missed it, but did you quantify what was the subcontracting contribution this quarter as of the [ center of me ]?And the last thing I'm going to ask this again. You have answered it in part earlier on the earlier questions. But this is on the ERP side. So 40% of our business is dragging the 60% of our business. So should we expect that when -- once this pent-up cycle is over, maybe the ERP business can help us grow 4% CPGR longer than some of the other companies? Because as a percentage of revenue, ERP is substantial in our books. So if you can address that, that would be helpful.
No, thank you. I think very pertinent questions. For order booking is definitely growing. It is just that you will see 1 difference that if there were these 3 years and 5 years earlier, these are the deals of 1 year and 2 years. Okay? That's the only difference. I believe that otherwise, our quarter-on-quarter growth is indicated that we have a much better order booking. Our new wins is also an indication that it is a better order booking. At the same time, you’ve seen we are doing better [ within ] the quarter is also an indication in that side. So that’s why I am happier with this situation rather than showing higher TCV value, then it was lower ACV value. Okay? That is one thing. On the subcon side, maybe, Chandru, if you can let me know what is the percentage that we have right now or maybe I wonder if you have the percentage with you, the data?
I have the data. I have the data, DK. Subcontractor expenses as a percentage of revenue in the second quarter was 16% to 1-6, 16%, and this went up from 14.5% in the first quarter. So there has been a quarter-on-quarter increase in our subcontract expenses.
Yes. Thank you, Chandru. And because the travel have not yet opened up, we have a lot of H1 visa-ready people who are still there with us. Now that it looks like that it is going to open up, I think that there is an opportunity that we can actually make these employees travel and replace our subcontractors. So the objective is that we come back to a 13% or to 11% or 12% level, it will be some call because that has been our -- generally, the percentage of subcon expenses.
That is helpful, sir. If you can just address on the ERP part? And just a follow-up to what you said. I mean, completely appreciate our bookings number. What I'm trying to understand is with the increased head count. Should we expect -- or what's the mix of these? Is it more hunters or it is more farmers? So I'm just trying to understand that perspective?
No, I think that is in the [ boating ] side, but Roop is here in the call. So let me ask Roop to give the more qualitative answer on the breakup between the hunters and farmers and how we are utilizing that on Enterprise Solutions side as well as on the other offerings.
So with our -- thank you, DK. So with our focus on our top 36 accounts, we’ve bolstered up our account management head count. So this is to ensure education for our client. That's one area. So addition to this, the account management, which is existing clients. The second area is Enterprise Solutions. So we've created a dedicated sales force for both our ACV and Oracle sales. And these are individuals who come with a background that is needed to be able to do [indiscernible] Enterprise Solutions. So, as you very rightly said, it's going to share both, account management and [indiscernible].
The next question is from the one of Ashish Aggarwal from Principal Mutual Funds.
Sir, most of my questions have been answered. Just 2 things from my side. First of all, given our growth rates and attrition, do you think this type of utilization is sustainable over a medium- to a longer-term basis? And secondly, on the Enterprise business, given the growth returns in that, and it seems that you are very confident on that. So do you think that would be a lever for the margins also?
Okay. Yes. First of all, let me answer the Enterprise Solutions side. The margins are better in the Enterprise Solutions side than into the newer deals in digital or [ people ]technology for the simple reason that these are many clients who are there for many years. And we have the execution needed already with us that is really delivering us the better margin. Any new deals by the nature, will always come with some level of investment from our side. Okay? So in the beginning, generally, the margin will be lower and slowly, we’ll start to pick up the margin with any such deal. So from that perspective, remain confident that the Enterprise Solutions will always give you better margins. Especially in our Birla update, it will always give us a better margin. So that is one thing. Second, when it comes to the growth rate and attrition and having the utilization at a higher level, if you look at that very carefully, we need to really look at how do we utilize our bench very effectively, so that we are able to improve the utilization on the billable side. Okay? It is all about how do you utilize your bench and how quickly can you upscale them so that you can utilize them in the engagement very, very quickly. And I think that improves the utilization. So I believe that 85% or so is assumable. Now the good part is that it is giving you an edge of about 1%. So that at any point of time, if you want to look at more investment for a particular client or for a set of clients, you have that headroom. Today, we have that headroom. Rather than giving the utilization, which is very lower than 85%, and you find that the headroom for the investment has completely dried up. So from that perspective, I believe that there. But at the same time, on the other side, we have to look at is that how do we continue to increase many other elements with respect to the pricing, the rate, okay, or many other levers that we have planned on the [ pyramid ] side so that we also improve the margins. Because both have to go hand-in-hand.
The next question is from the line of Dipesh Mehta from Emkay Global Financial Service.
Couple of questions. First about Europe. If I look, Europe continue to remain weak for us. Last time, you indicated we are taking some corrective actions, and we expect some recovery to happen in Europe. If you can provide some update on the progress which we made, where we can see recovery see in Europe. Second question is about other expenses lately. Now we have seen 280 basis point increase in this quarter. 150 basis point explained by subcon, but still, it is 130 basis points higher. So if you can provide some detail about what is driving our higher other expenses? And how sustainable it is? Is it driven because of some one-off item? Or it is more sustainable uptake?And last question is about our sales. So sales conversion, if I look at segment, sales income remains same as last year. If you can put some perspective on how you’re going to grow your sales conversion?
I'm sorry, what was the last question, Dipesh?
Sales conversion. So if I look this year, we have generated INR 58 crore, INR 59 crore, OCF versus last year, INR 300 crores.
Okay. Okay. So I would ask Chandru to answer the second and third question that you asked. Okay? But Europe, let me answer you first. On the Europe side, we have started putting our chips on the [indiscernible] -- we have started to see some improvement, though the results may not be seen in the quarter 2, but we made a good win with one of the clients in the quarter 2, which is part of our net renewal revenue, by a renewal that has happened in Europe. And you’ll start seeing that. There will be a growth in the revenue that will start coming from quarter 3. Okay? So that is already happening, and we started to go after those deals. So that is 1 element that is there. As far as the other expenses are concerned, I think Chandru did answer the question before, but I will let him clarify that again. And also on the -- our sales side, he can again provide the answer.
Yes. Sure. So the 1 primary driver for the quarter-on-quarter increase in our expenses was subcontractor costs. There was also some strategic investment that we made in our effort to drive to our $1 billion aspiration that DK has set for us. So that cost as well was in our second quarter number. Your question was, is it sustainable? The answer is, yes. We expect that the subcontractor cost will slow down based on some of the efforts that we're making that DK already talked about and when travel opens, when the whole existing situation kind of subgrade. Your third question was on the operating cash flow, why is it lower in the second quarter? There were 3 items that we had to bake in. One was there was a dividend payout in the second quarter as we had [ deferred ] the final dividend announced in the month of May, and we paid it out in our first -- after the general meeting. Second, we also had to increase our outlaying, our working capital in order for us to fund the additional growth that we had in the past quarter. And the advanced tax payout in India and some of our large geographies also took some cash payout, which is why you see our cash flow in second quarter being lower than the first.
Just on the second question about you said we are conducting some strategic investment to expect revenue growth in our $1 billion. If you can provide some more details, what kind of investment we are making?
DK, do you want to talk about that?
Yes, I think you're saying for the $1 billion, right?
Yes. The strategic investment I am referring to.
Yes, strategic investment. Yes. Correct, yes. So there are quite a few investments that we had to look at. One is definitely that we need to firm up our strategy. Okay? And the strategy have multiple elements into it. One is that what are the newer technologies that we should develop? Okay? Or what are the capabilities that we need to develop in the newer technology or emerging technologies. Okay? That is one type of investment that has to continue to happen. Okay? Secondly, the domain expertise that we need to do because we have moved from a vertical to micro vertical. And when you're going into the micro vertical, you need to go and demonstrate the domain expertise in those micro verticals and in building team and building and proposing a solution. So that is also the second level of investment that we have to do in order for us to go and capture the demand that comes our way with respect to providing the industry solutions or platform-specific solutions. That is a second thing that is there. Third is that we are also trying to engage on creating a full-blown strategy for our $1 billion company. Okay? And that requires M&A also to be a significant part of that because we -- when we had to look at the M&A, we have to look at what is the kind of candidate that we will go after and effort in order to identify work on that and also ensure that we are going after the evaluation of the right set of candidates. Okay? So some level of consulting charges that will be there on that front, also those kind of expenses are definitely going to come in that front. So these are the 3, 4 type of significant level of investment that will happen. Now if I look at on the other side is that how do you continue to have a larger setup fee in the market. That means that am I hiring more account managers and the hunters. And also looking at structuring my sales in a way that I can take the advantage of the offering that I have. For example, 6 months back or 9 months back, we came out with the core channel strategy, we casted that as a separate team so that we can focus along with our OEMs. That have shown up some good result. Okay? So what we have seen is work investing the effort, the money on such kind of structural changes of the organization so that we can capture the better [indiscernible].
The next question from the line of Vimal Gohil from Union Asset Management.
Congratulations on very good set of numbers, sir. Sir, I just want to understand the segmentation of your service line in which you include Business & Tech Transformation, Enterprise and Cloud. Now understandably, what -- I mean, what our understanding is on Enterprise is that the way in which BRT solutions will be delivered incrementally will be more SaaS-based. And that the way in which it is delivered, it's changing. So on-premise it's going to ship to cloud. So basically, what is happening is your more -- the higher number of [indiscernible] customers you have and probably shift onto cloud, which means incremental revenue growth will come from Cloud-based revenues rather than Enterprise Position. So I just wanted to understand further your comment on the stand-alone Enterprise Solution doing well despite having some sort of a greenfield. That is point number one. The second point is within Business & Tech Transformation. How much of revenues in this particular service line would do -- broadly? If you can give me a broad number of what’s that? What would be the split between pure digital services and maybe legacy? Those are my 2 questions.
In the business on -- you said the Business & Technology Transformation, right?
That's right. That's right. Yes. Yes.
Now Business & Technology Transformation mostly will be your digital revenue. Mostly. Okay? There could be only 1 or 2 items that might be there, but those will be not very significant. So you can assume that 90%, 95% of that revenue will be digital revenue. Now there will be certain digital revenue that we count if somebody counts the way rest of the industry does. For example, cloud revenue, you can count that as a digital revenue as the other companies do that. Similarly, on the Enterprise Solutions side, some of the SaaS solutions, such as TRM, can also be counted as digital revenue. Okay? But we had kept that as part of the Enterprise Solution because if -- as a PCR is getting implemented, we consider that a part of SAP and not as a separate digital revenue. Okay? Because somehow, all these Enterprise Solutions are also becoming equally digital. Okay? Now you cautioned about that the Cloud-based solutions, SaaS-based solutions, most of the ERPs are going to move to the cloud, and how do you look at that? If there is a SaaS-based Oracle recipe/solution, we count that as part of the SAP and Oracle only. We don't count that as a separate cloud submission, okay, or cloud revenue. The cloud revenue that we have talked here is mostly around the application modernization or infrastructure migration to the cloud. That is what we accounted here rather than counting everything because cloud could mean everything to everybody. Okay? Anything to anybody if it can be counted. So we have segregated that so that we can very clearly define what is going to be the cloud and what is going to remain attached to the OEM because that is the way newer relationship with OEM works. They do not want their revenue to be broken into the CRM separately, ERP separately and cloud revenue separately. It has separately moved. They want everything to be in one bucket, and that’s the reason we keep as part of the Enterprise Solutions.
Okay. Just to understand, I mean, the cloud-based services that you report, and as you just said that this will be more application modernization, And so would it be fair to say that while the growth in cloud -- the cloud-based services is higher currently, but the most structural story for you will play out within Business & Tech Transformation? Will that be correct assessment? Because at some point in time, most of the application warehouses for clients would have modernized and would have gone into cloud, post which you can cross-sell other services like maybe analytics or mobility, et cetera, on the digital side. So on a structural basis, on a long-term basis, the business in Tech Transformation is a more sort of a -- in terms of growth, that could be a better growth story as compared to cloud on a longer-term basis. The near-term growth of course will come from cloud.
No, absolutely. Absolutely. Because at the end of it, it doesn't matter whether you are on cloud or on-premise growth. You are able to get the business value that you are asking for. Okay? What has happened is that many times now, by having Azure in place, or AWS in place, or Google in place, there are certain types of value that is part of the cloud that one can leverage when they move some of their applications direct to the cloud. For example, if you want to have the -- have better analytics story, one will move to the Google Cloud because they are very strong in the data analytics side. Similarly, if you want to move your ERP pieces there, okay, or industry solutions, probably AWS and Azure will be far better. Okay? And at the same time, SAP has much better solution actually on the Azure. Okay? That is the way how the clients are moving. So at the end, what we have to look at is that whether we will be able to deliver the services or upsell the services once somebody is on the cloud because migration is not a big-ticket item. Many of the migrations are just lift and shift and may not have significant revenue. But the significant revenue comes when the clients want to transform after they have migrated to the cloud. And that revenue, we will see as part of the digital. Okay? So your observation is absolutely right that eventually, the organizations will want to transform and that kind of revenue will be far more sustainable and it is part of the Business & Technology Transformation.
I now hand the conference over to Mr. Dharmender Kapoor for closing comments.
Yes. Thank you very much, everyone, for joining the call and asking very pertinent questions because these are the questions. It is always good to reflect after every quarter as to, one, are we directionally right? Second, the commitment that I have made to the market as well as to ourselves within Birlasoft that we want to be very, very predictable and sustainable company. I'm very happy that it was the fourth quarter where we have shown quarter-on-quarter consecutive growth, and it is looking now clearly visible that we will continue to show quarter-on-quarter growth for a very long time. Okay? So that is one thing. I know there is momentum in the market also, but then the organization has to be prepared to capture the momentum that comes their way rather than really looking like a gap on the road where we are not able to run immediate direction when a car is approaching. So I think this is a good position to be in. So I know that we need to improve again on the EBITDA side. We improved from 9% to 16.9% in those 6 quarters -- 5 or 6 quarters after acquisition of KPIT’s IT business. We grew to that level, and then we have seen the attrition and higher cost of resources hitting us by about 200 bps in the last 2 quarters. But I am very confident that with this whole attrition softening up in a quarter or so, I think we will start getting back to where we were because we have already attested how to be there at 16.9% or 17%, and there is no reason why we will not touch back to the same place where we were in the quarter 4. So thank you very much for all your support and your participation. I'm looking forward to continue to show better and better quarter going forward. Thank you very much, once again. Stay safe.
Thank you very much. On behalf of Birlasoft Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.