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Ladies and gentlemen, good day, and welcome to the Expleo Solutions Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions]Please note that this conference is being recorded. I now hand the conference over to Ms. Asha Gupta from Christensen IR. Thank you, and over to you.
Thank you, Sanford. Good afternoon to all participants in the call. Welcome to the Q1 FY '22 Earnings Call of Expleo Solutions Limited. The results and investor presentation have been already mailed to you and they are also available on the company's website. In case anyone does not have a copy of press release or presentation, please do write to us, and we'll be happy to send you the same. Representing the management today, we have Mr. Balaji Viswanathan, Managing Director and CEO; and Mr. Desikan Narayanan, Chief Financial Officer. Mr. Balaji will start the call with brief overview of the quarter gone by, which will be followed by Mr. Desikan, who will be getting into detailed financials. After that, we'll open the floor for Q&A session. As usual, I would like to remind you that anything that is mentioned in this call, which gives any outlook for the future, which can be construed as forward-looking statements must be viewed in conjunction with risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual report, which you can find it on our website. Having said that, I now hand over the floor to Mr. Balaji. Over to you, sir.
Yes. Thank you, Asha. Thank you so much. Good afternoon, everybody. Thanks for joining our call. Just to give a quick overview about the quarter gone by, we have had a reasonably good quarter, and we continue to see positive trends, both in terms of pipeline and in terms of opportunities that actually presents to us. The entire IT industry in India or rather across the globe is actually seeing a good amount of traction, thanks to the acceleration of the digital transformation and actualization of many projects that the clients are trying to do over the last couple of quarters. The initial challenges around COVID seems to have gone by and people are making sure that they are keeping abreast with the latest technologies more in terms of security and digital transformation as well. So that's actually giving us some opportunities similar to how all our peers and the bigger IT companies in the Indian IT industry as well. So that we see -- continue to see good traction in the demand across all the regions, particularly in Asia, and we've also seen demand picking up in Europe as well. The opportunity for specifically automation, digital services and specialized testing, which is around testing the digital enablement and also on security and performance has been growing significantly, and that's where we see demand as well. During the first half of this calendar year, we have added actually some of -- some key strategic clients: one client who is actually based out of Asia Pac; another client, which is a large global company, which is operating out of India already, and they are strengthening their offshore and India presence. And both of them are looking to contribute to more than $1 million during this particular calendar year. Digital Services continues to grow from close to around 14% to 15% of our revenues in December 2020. Currently, it's doubled from there, and it's close to around 29% right now, and we expect it to be around 33% during the end of this calendar year. Our offshore business contribution has once again significantly changed. And that continues to change over the last 3 quarters with more work coming offshore and some of the on-site presence reducing, which is actually good for us from a margin perspective, not -- even though not so much from a top line. Currently, almost 60% or over 60% of our business comes from the offshore headcount, around 40% from some on-site compared to 48% of the offshore contribution year-on-year, if I were to compare 4 quarters back. So that's actually helping us in building a robust platform in India and also helping us in making sure that we are able to focus and anticipate the kind of demand that we can expect. And based on that, we can scale and look at where -- what kind of capability that we need to build as well. While the industry trends and the climate heating up is also having a negative impact, primarily because the costs are increasing significantly, we are also seeing an increased amount of attrition similar to all our other ITPs as well. While that would have -- that may actually have a temporary impact on our costs, but we don't see that having a large long-term impact. We expect it to probably last for another couple of quarters at best. The second wave of COVID also had some impact on us because the spread of COVID was quite significant and quite rapid, and we also faced some impact with companies' level of infection, with a [ hiring freeze ]. And we also had a few unfortunate casualties as well. And we stepped up the vaccination, we stepped up [ hyper care ] for our employees. We also had emotional health assistance, which we provided through external specialists as well, trying to work through the current stressful situation across both the team members and their families. We conducted a few drives in Chennai that we had the scale. In other places, we have been trying to partner to get our teams vaccinated. We are probably currently at approximately 55% to 60% of the teams getting vaccinated, and we still have the remaining people who have to complete their vaccination process in which we are constantly following up that as well. On the merger of the unlisted entity, which we announced on the 3, 4 weeks back. The process has started. We have applied. We have submitted our presentation to the regulatory authority. We are going through the process. The process will take anywhere between 2 quarters to 7 to 8 months. We expect in the best case scenario to get this completed by Q1, the calendar year Q1 of 2022. That is March 31, 2022. But give or take the kind of time frame that it takes nowadays due to the pandemic, it may probably happen either in March or latest by April. So given that, we may probably not have all the information about the unlisted entities, which we can present here because they still follow the same private limited company normal regulations, which is not the same as what we do in terms of quarterly results and publishing. Apart from that, we have signed up for the facility in Coimbatore. We are doing a significant amount of hiring and ramp-up, both from campus and also in the early stages and investing in the upskilling for the teams across multiple locations, primarily between Coimbatore and Chennai and Bangalore. And we expect that to continue. And we are also working on enhancing that to spread across Pune and the other locations as well, anticipating to be ready before the actual merger of the entities as well. So that's quickly about the past quarter and some latest updates. I'll pass it on to Desikan to cover the specifics on financials.
Thanks, Balaji. Good evening to all. We started the first quarter of FY '21, '22 with the revenue of INR 88 compared to INR 79 crores in the previous quarter. Growth was around 11%. We have reached a new benchmark in the revenue number compared to any of the previous years. EBITDA ended at INR 14.6 crores against the previous quarter of INR 19.1 crores. We did see a drop in EBITDA percentage to 15.6% compared to 24% in the previous quarter. Earnings per share have moved by 16.6% from INR 10.72 crores to INR 12.5 crores due to PAT ending higher compared to the previous quarter. A major contributor to the increased costs as mentioned by Balaji were from salary cost and for consultant costs due to the co-mingle. Our third-party consultant cost is grouped under other expenses. That's the reason you see the increase in the other expenses starting through this quarter. This started from previous quarter, we did this change. Our third-party head count increased to 336 now from previous last 3 quarters. Other than third-party consultant, we also incurred costs during the quarter, cost of merger program and some training. And we also had some rates and taxes reversal in the previous quarter because of the previous quarter, we had proof of corporate taxes and this is the rate which shows a little higher amount. So that's about the reasons for the change in the expenses. And then the other income, it also includes the gain of 26 million. Last quarter, we had a loss of 23 million. And looking at -- that is on quarter-on-quarter comparison. With respect to last year's same quarter year-on-year in comparison, we had a 16% growth year-on-year, with revenue ending INR 88 crores as compared to INR 77 crores in the previous year same quarter. EBITDA from 25.5% to 15.6%, main contributors are the same set of reasons what I mentioned before. PAT is at 14.1% against 18.3% in the previous year same quarter. So this is a brief about the results. Now I'll open it up for the Q&A portion.
[Operator Instructions]The first question is from the line of from Mithun Aswath from Kivah Advisors.
Just wanted to understand this increase in cost. Is this more like a onetime increase? Because obviously, our EBITDA margins have come much lower than what we had guided in the previous call. So just wanted an insight on that. And what has driven this appreciable growth in the top line this quarter? Is it that we won several new orders? Just wanted your take in terms of what is the hiring number that we're looking for in FY '22. And secondly, could you just give us a little bit of an update of the business which is getting merged? And how, at least in terms of trends, how they are shaping up, even if you can't talk about explicit numbers.
Sure. The reason for the cost increase, like what Desikan mentioned are threefold. One is the increase in the third-party consultants. Third-party consultants it's actually -- it's the delivery team primarily, but instead of hiring them in our roles, they are actually trying to source it through consultants so that we can actually deploy them faster. Because if we were to hire them, hire laterals from the market, it takes anywhere between 30 to 60 to 90 days, depending upon what kind of notice periods that they go with. And that's the reason why we normally go through consultants for short-term requirements or who we need to hire faster. And that is the reason. And typically, what happens is that there is a time lag from the time you hire before you deploy them of anywhere between 3 weeks to 4 weeks, because it takes that kind of time frame to do background verification and all those other elements because we service mostly financial services clients. And we can't just hire and deploy them straight away. So that's the reason why you see that now because if you were to look at the growth, most of it is like -- it has a lag effect. So you will see this over the next couple of quarters as well as we see the demand, but it's not on one time -- it's not something which is going to be a long-term impact per se. It will settle down as we start hiring more in the coming quarters as well. And the second element of the cost increase is like what Desikan mentioned earlier around the merger costs and some of the rates and taxes, which we reversed in the last quarter because of which we saw a higher EBITDA margin in the last quarter. So now there are no reversals. Most of catch-up approvals and reversals happen only at the end of the financial year. So that's the reason. So there is no systemic challenge, and we still expect that we would be in that -- anywhere between 18% to 19% EBITDA margins is what our expectation is, even though it's not a guidance per se. On your second question on what is driving the growth. It's similar to what you see across the Indian IT industry. There is a lot of demand, pent-up demand because of -- which was held up in the first 3 quarters of COVID, which is now surfacing. And everybody wants to try and accelerate most of the digital transformation program because they want to reach to the customers faster as they see competition catching up as well. So that's the primary reason. So the demand is increasing. And primarily, the demand is increasing in the newer technology spaces and also the traditional testing spaces as well. And we see demand across Asia, U.S. and the European markets as well. And we have seen the change, if you were to look at the earnings presentation as well, it talks about the growth by region and you could see that the primary growth has been in the Asia Pac and the Europe region primarily. And on the last question on the merger and the to-be-merged entities, the invested entities of the group. We don't -- since they are private limited companies, there isn't really any quarterly financials or audits that gets done. But as the -- if you were to look at the current trend, they are in line with what we were expecting as part of the merger as well. And they are also growing in similar paces because the industry as a whole is growing, and we are just trying to keep our growth pace as fast as the industry. And they are in line with what our expectations that we have in terms of the merged entities' numbers as well. Desikan, do you want to add anything more?
No, I think you have summed up very well.
The next question is from the line of [ Ashish Dash ] from [ Sherkan ].
Sir, you mentioned that EBITDA margin would be 18% to 19%. And this quarter, it's around 16.6%. So do you mean that on sequential basis, there would be improvement for the remaining quarters? And when would you take the rate hike?
Yes. So like what I mentioned, the primary reason for the cost increase or the EBITDA margin to go down is around the third-party costs. Third-party consultants who we are hiring to deliver. And depending upon when they get hired and when they are able to bill is where the lag is. So some of the growth which happened in the month of -- the last part of May and June. We have to hire and keep them for 3 weeks or so when the verification and all those kind of thing happens. So that is the reason why there is a lag. Over a period of the next 2 to 3 quarters, it will all settle down because the pipeline will become streamlined. So we expect that for the financial year, we'll still be in the range of around 18%. And in terms of -- sorry, I missed your second part of the question.
Salary hike, I asked.
The salary hike is calendar year. So our salary hikes actually happened in January. But the kind of pressure that we are seeing on costs, particularly on compensation from the industry, the kind of the salary increases that we're seeing in the market, we may probably have some impact when we do the salary hikes in January. But we are still confident that we should be able to manage some of the other levers if we are able to increase the offshoring percentages and other circumstances.
Okay. You are mentioning that in Q4 FY '22, you will take the salary hike, right? Hello?
Sorry. Yes, we lost you in between.
I'm asking when you mentioned that January is the cycle for your salary hike. So you would take salary hike in Q4 FY 2022?
That's right.
Correct.
Okay. And sir, on the revenue side, last con call, you mentioned that the growth would be between 15% to 20% in FY 2022. And with the Q1 sequential growth has been even strong, 11%. So you are saying that demand is strong, you are hiring third-party consultants and all these things happening. So the growth momentum on sequential basis, can we expect to continue for the remaining quarters?
Yes, that's -- we expect that it will continue for the remaining quarters as well. Q4 is the quarter of October, November, December, normally gets a little slowed down because of the number of holidays. But overall, I think for the financial year, we should still see the 15% plus growth that we talked about.
Sir, on sequential basis, I'm asking. On -- this quarter, you have referred 11% Q-on-Q. If this happens, this run rate goes and so it would be the growth would be around 25% to 30% year-on-year in FY '2022?
That's what I'm saying. So your Q4 or Q3 of the financial year, considering that the number of working days will be much lesser compared to the other quarters and most of the countries go on holidays and other stuff. We may have a small plateau there. But other than that, the rest of the quarters should still see the 1 which you're talking about sequentially at 10% to 15% growth. And that could end up anywhere between 15% to 20%.
Okay. Sir, last question, your top 5 client growth has been even strong for last 2 quarters. So could you please highlight or give some color why -- how the growth has been so strong for top 5 clients? What has happened here? And these top 5 clients would continue to report strong?
Yes. So it's not the same top 5. So that is what I had mentioned in the initial comments as well. We signed 2 new customers between Q4 -- the calendar year was October, November, December 2020, and the Jan, Feb, March 2021. We signed 2 new clients who are -- who have actually now moved into our top 5 as well. Primarily these 2 clients are actually contributing to an accelerated growth. And our existing customers, like I've mentioned earlier as well saying that we have done investment in sales and client engagement teams in Spain and in Belgium that we have some of our strategic customers, and that's showing some results as well.
Okay. Sir, my last question, if I can, last con call, you mentioned that the combined entity cash position was at least INR [ 77 ] crores. Any number around that as of June 30, 2021? And as we mentioned that there are supply side issues and some margin impacted, we saw margin impacted for our entity Expleo Solutions. So is there -- can you give some qualitative commentary, is there any impact on unlisted company's margin?
On the cash side, I think we have what -- currently, what we have is around [INR 110 crores ] is our cash balance. You want to -- remind a number of the unlisted companies and we are not audited. So I can tell that only for our listed company. And I'm sorry, I missed the second question. Can you repeat it a second time?
There are supply side issues in the industry. So any qualitative commentary from your side? So how -- our margin for the unlisted entity was 19%. So is there any impact also for the unlisted companies on margin front due to the supply side issues?
I think Balaji was mentioning about the unlisted company that on an overall trend it seems to be in the same trend of what we saw in the month of March that continued. But on the margin side, it is generally, doesn't have -- the quarterly things have ups and downs on this. So we don't see any large change in that. But once the quarter moves to the second and third quarter, then we will have a more known numbers which we'll comment on rather than the first quarter.
Supply side issues, Mr. Das, the supply side issues are not impacting what we are delivering to our customers right now.
The next question is from the line of V.P. Rajesh from Banyan Capital.
Congratulations Balaji and Desikan on very strong traction on the customer side. So Balaji, if you can just give a little more color on these 2 large customers in terms of what segment they are in? And who were the competitors for this piece of business. That will be helpful to start with.
Sure. So 1 is actually a large payment technology company who have customers and their own services across the globe. And we are actually servicing them through their own center in India, and we are doing it through their own center in India for multiple geographies, including their U.S. operations and their European operations and also the Middle East operations as well. So that's one customer where we have been growing quarter-on-quarter sequentially for the last 3 quarters. It was signed sometime in November -- the first week of December of 2020. And the second customer is actually another multinational insurance carrier, but this is signed in the Southeast Asian market, covering across Singapore, Malaysia and Indonesia. And this is also for their digital transformation program and what -- how we are helping them in both in the quality assurance services and also in security and performance in rating services as well.
Great. Great. And any update on the U.S. side? Have we -- I think we hired some people last quarter, if I remember correctly. So how is that coming along, if you can just comment on that?
It's -- we hired a person last quarter, and we started the traction and the pipeline is something which is coming up at this particular point of time. We are also organizing a couple of events and roadshows in the U.S. by end of September and early October as well, just to try and create some brand visibility for ourselves. And there is an inside sales team, which we have dedicated for the U.S. market as well to try and build some of the lead opportunities through them. And we expect that we should start showing some results starting from the next quarter onwards.
Got it. And just on the numbers, if I look at your other expenses year-over-year, they have gone from INR 16 crores to over INR 30 crores this quarter, right, year-over-year basis.
Yes.
So whereas the revenue year-over-year has gone up by INR 12.2 crores. So obviously, you won't be hiring these consultants at a negative margin. So I'm assuming the merger cost must be also a big chunk in that INR 30 crores number, so any color on that?
But predominantly, there is only the third-party consultant increase. And I mentioning about the number of people almost 100 people increase, but compared to last year, it was much more. Last year, we -- last year same quarter, we had around 120 to 130 third-party consultants. Now it has grown up to around 300 odd consultants. So that's the reason you see the big increase in the third-party consultant costs. As far as the merger, it's in the range of around 20 million is the range what we have spent in the merger-related expenses.
And you would see that going through in the next few quarters also basically?
Which you are talking about? The merger?
The merger cost.
Merger costs will reduce because a major part of the thing has been done. Now only it's the milestone, which is pending any around -- there are only 2 things there. One, we need to get the stock exchange in CIB and NCLT. So there, it's only a part of the cost coming in, not major cost will come in. Most of the costs have got done for all the DDs and the other related items.
Yes. But 1 thing which -- sorry, Desikan, if I can just add a big limit of stamp duties.
Stamp duties, that's correct.
Of the merger. Yes, that's a huge component.
That's a big one.
That will happen when we get the final NCLT approval, which is either in March or April.
Yes. Correct. Or May.
Okay. Okay. And any idea of what that cost would be like in the milestones?
I can check and get back to you because is depends on the number of shares we issue as well as the [ convertible ]. I'll get back to you on that.
Okay. Okay. And lastly, what was the contribution from the group in this quarter? And did it increase compared to the last quarter?
It was almost flat. It was around 21% of our revenue was from the group.
Okay. Okay. So it seems that then the growth in the quarter was predominantly from the initiatives that we have taken, right? That seems to be doing a much [ higher pace ], then.
Correct.
Yes. I just wanted to clarify 1 point there, Rajesh. While we said the group revenue is still 21%. The engagement in countries like Spain and Belgium, even though it was actually a direct client of ours, the selling and client engagement is through the group. Because while we are reimbursing or we are having a salesperson for us dedicatedly but it's actually managed through the group. So that also is a significant contribution. So if you include that, I had mentioned this some 3, 4 quarters back as well, if you include that, the group contribution is almost 45%.
Right, right. And -- but what I'm saying is compared to the last quarter, if you include that in the last quarter also...
Apple-to-apple comparison, it's still flat.
Yes. So that means your other business is growing much faster than the group?
Yes.
The next question is from the line of Rahul Picha from Multi-Act.
Sir, firstly, I wanted to understand the growth outlook better. So you are saying that this year, we could end up achieving 15% to 16% growth. But when I look at our Q1 numbers, and if I were to annualize the current INR 88 crore run rate and compare it with what we did in the last full year, we did around INR 301 crores. So that itself works out to about 15%, 16% growth for the year. So are we not expecting sequential ramp-up from here on? Or we expect to grow much more than 15%, 16%?
See, once again, I don't want to make it look like we are doing a forecast of what our numbers are. The expectation is that we will continue to grow at more than what we are at right now because even in this particular quarter, there is the next quarter, Q2 of the financial year, you will actually see an even larger growth as well. So the expectation is that we will certainly cross the 15%, 16%, but that's the modest target that we want to go with at this particular point of time. So we expect that we'll probably be in that INR 90 crores plus is what our expectation is.
Got it. Got it, sir. And sir, could you also please give us what is the constant currency growth for the quarter? Hello?
Yes, sorry.
Sorry, I can give it. Sorry, I was on mute. On the quarter-on-quarter, the constant currency growth was 10.3%. Year-on-year, it is 12.8%.
Okay. Okay. And sir, on the head count, could you please share what is the employee count including subcontracting end of June '21 compared to what it was a quarter back?
The subcontractor is around 330 and including the employee, it is...
1,470, it was.
1,470 it was, yes.
Okay, okay. And sir, what would be our utilization in the first quarter?
Around 83%. 83% to 84%.
Okay. And what would be the optimal utilization for us?
85%, 85% to 86% is what we normally targeted.
All right. Sir, last question from my end on capacity office space that we have at the group level, what is the kind of headcount that it can accommodate? And after this new Coimbatore thing that we have done, what would that capacity increase to?
So the Pune entity has a lot of capacity because it's an SEZ location it's a 2-acre campus. And the current constructed capacity, it's around 1,150 to 1,200, out of which only around 800 is being used. And then there was another partial, which also can accommodate another 700 to 800. So the merged entity, we are -- our current capacity itself will actually -- that is including the Coimbatore on and all the other centers put together, our current capacity itself will actually take us through close to 4,000, 4,300. And we expect that as part of this new normal of work from home, we expect that at least 20% of our population will continue to operate from home even after, even post-pandemic. So that should actually give us capacity of at least 5,500 to 6,000 people with whatever facilities that we have got right now in the merged entity -- going to be merged entity.
The next question is from the line of Rajesh from [ Znet ].
My question is like what are the challenges that you foresee with the merger? And what kind of opportunities that we foresee with the merged entity?
Challenges with the merger, it's 2 different entities. And obviously, the challenges are basically to make sure that we are able to integrate both people and processes effectively. And that's the challenge with any merger, particularly in the services industry. The importance of people is very, very important. That's the most critical element. And so that is what will probably be our endeavor to make sure that we do that right. And in terms of opportunities, there are plenty of opportunities. The first thing being the entire engineering capability that we can take to our direct customers and the opportunity of trying and leveraging more work from the group now that we have an end-to-end capability in 1 entity rather than going between multiple entities, which was the case earlier. So both of those put together, we are quite confident that the kind of opportunity that represents is quite strong and will continue to drive our growth over the next at least 2 to 3 years.
So can we see more traction from the U.S. business in that case?
Not from the U.S. business. I'm saying from the group, because U.S. business I'm sure if you were there in the last call where Rajesh Krishnamurti was also there post the merger. The U.S. business, the group is not -- well, we have close to around 70 million, 80 million of business from the U.S. That's not the biggest, because our strong geography is still Europe. And we still have a lot of opportunities, which we haven't tapped there in Europe itself.
The next question is from the line of [ Vikash ] from [ ONGC ].
Yes. Just 1 question. Can you give some idea of what is the order book position of the -- Expleo? And what would be the order book position for the merged entity at this moment?
Desikan, do you want to take that?
For the merged entity, it will be difficult to tell that. Only we can say about us compared to what we have because we only follow ours. We don't get into that as of now. For us, if you look at the order book facility, we -- for the next -- this quarter will be a major quarter for us where we will have -- we have Middle East growing. And APAC also we are seeing more traction coming in out of the existing clients, which will grow in the APAC. And we see some traction from the Europe as well as some of the clients also coming out in the U.S. So that way, we see that we will be achieving more than what we thought in the quarter 3 and for quarter 2 of the financial year. Quarter 3 will be a little bit slump as Balaji was mentioning that we have holidays and leads coming in. There we see a little bit slump not to a greater extent, but we will have a slump in more -- traditionally it's a little bit weak quarter is what generally we have. And quarter 4 is -- we see that to be like a little bit higher to around 10%, 15% higher than what the quarter 3 will be. That's the way it is. And we see that more traction, it is more from an angle of how we are going to go [ sell there ], is the thing which is going to come in too. The demand is there in the market. We need to find the demand and get the people and supplied. That's the more challenge currently we're taking into.
Okay. But can you give some idea about quantified numbers? Like you said 15% more 18%, no idea on quantified numbers what is earlier -- in other companies, I get real quantified there. Or what are the [ positions ] like INR 400 crores, something like that?
Generally, we don't give a guidance. That's the reason we are like staying with our system and giving you a quantity wise percentage. Because that becomes a guidance statement from us, which will -- it is not something which we do. We can generally give an overall kind of how the trend will be in each quarter, what we are coming out until the end of the financial year. Giving a specific percentage will always be -- we generally don't do that. That's reason we suspended giving it overall. What Balaji says in the year-on-year, we are looking at something around 15% is the one which we are seeing there. But on a quarter-on-quarter basis, it will be too detailed for us to give a guidance.
The next question is from the line of Rohit Balakrishnan from iThought PMS.
I have 3 questions. So one is -- so I mean, we are at almost INR 88 crores INR 89 crores in this quarter. So from a -- I mean most of, I mean the industry and the other companies were -- bigger than us, but still not as big as some of the major ones are growing at 4%, 5% constant currency basis sequentially. So is it something that we can do? Or do you think that given we are not in the largest market could be a challenge for us? I mean, just wanted to get your perspective on that.
You're saying 4% to 5% CAGR or in constant currency?
Yes, sequentially, right.
Yes. We are currently -- this quarter, we have done around 10.3%. And we are confident that we should be able to continue at least for the next 3 quarters in that either a high single digit or in double digits in constant currency.
Sequentially, you're saying?
Sequentially, yes.
Okay. Okay. So got it. So just as a side note to this question. I mean, you've not grown like that, I mean, in a very long time. So this organization perspective, are we geared up, I mean, in terms of bandwidth of maybe middle management? I mean, is there something that -- from that?
[Audio Gap] That kind of growth
I'm sorry to interrupt. Sir, your voice is breaking.
You're saying that whether we are geared up for that kind of growth? Yes, we are Rohit. We are building this capability, and we are leveraging the full benefit of what the group offers as well. Because if you recollect 2, 3 quarters back, as soon as Rajesh joined, we made that announcement around what the group is doing in terms of consolidating all the capabilities and competencies under digital capability and also on automation and quality capability as well across the globe. And that capability is something which we are leveraging to the maximum extent to make sure that, that particular team guides the middle management team here and also helps us in recruiting the right kind of talent as well.
Sure, sure. The other question was I think in the con call that happened some time back after the merger, I think Mr. Krishnamurthy said that there at a global level, there is a target to sort of increase the overall offshore income single digit to 20% or so or 25%. I mean, has that process started? I mean, I think you mentioned that this quarter also the group business was sort of flat. So I mean, is it that once the merger has happened, only then the process will start? Or just wanted to get some sense.
Yes, the process has started. There is a specific governance around what is being offshored and how it's being offshored. But most of it is around the engineering business as the offshoring percentages have been traditionally very low. So once we do the merger, we will probably start seeing a lot more traction there because that's where the focus to increase the offshoring is. Because that's the low hanging fruit, and that's where the maximum number of opportunities are.
Right. And typically, Engineering Services is a higher-margin business. I mean, I'm not taking what numbers you've given because I think there was some one-offs there in terms of COVID, et cetera. But in general. Are those -- I mean, is that business a higher-margin business in general? I'm asking and going forward also, will that be margin accretive for our -- I mean, for the listed entity?
The margins are not very different. It's slightly lower than the typical IT services margin, but it's not very different. Particularly, when we do offshoring and particularly when we do the transfer pricing through the group, the margins don't differ much because it's, end of the day, a cost plus and the group business comes up.
Next question is from the line of Rohan Advant from Multi-Act.
Yes. Most of my questions have been answered. So just on the financials of the unlisted company, you said they are private and they don't do the quarterly thing. So when will we get to know these financials? Will it be after -- or will it only be after the merger that these financials will be disclosed to the shareholders?
Generally, the way it happens is it will be around the end of the year. They do the -- they have their own audit cycle where it starts around the January, February time frame for them to close it for the 31st March. So that's the time we expect that we can get the audited numbers from them. Until that...
Okay so on the matter -- yes, yes. Go ahead.
And also the date -- the date at which we will merge is 1st April 2022. So maybe at that time, you will have the full-fledged financials of all these. After that's posted, once the audit is over, then we will have some numbers in place so that we can provide it to everyone.
Okay. And when you talked about our current capacity and you adjusted it for work from home and you said it's 5,500. This is including the recent announcement that you gave of Coimbatore increase of capacity and rationalization in Chennai or that is over and above that?
Yes. This includes the Coimbatore capacity as well. We have rationalized some of our premises in Chennai. And we are looking at primarily utilizing Coimbatore and the spare capacity that we have in Pune.
Okay. This capacity you expect to utilize at the group by FY '23? And is that the plan?
Yes. So like what I mentioned, the Pune capacity is only 1 part of it, which is ready and which we can use right now. The other 1 is a partial at this particular point of time, which we will -- which we will develop or which we will fit it out once we have the right level of demand. And including the premises, yes, by '23 is when we expect that demand to be.
Okay. Sir, lastly, on the engineering R&D, if I look at the Expleo Group, I think about more than 60% of the revenue that is the R&D. Could you throw some -- give us some color on the kind of services that they do? Is it software, mechanical, electronics? And is there any peer set that -- are they like the [ NPS ] of India that you compete with? Because over time, this would become a larger piece of the merged entity. So something on that, please?
Yes. So the engineering services, the key elements which are done from India is primarily around what we call it as emerging engineering services, which is around embedded systems and software design and software testing, software validation for the automotive and avionics industry. And other 1 is the mechanical industry, which is around the plants and setting up of plants and setting up of assembly lines and the assurance around those particular services. These 2 are the major ones. The third, which is fastest growing even in that segment is the digital services within the emerging engineering services as well as around embedded systems and the automated car and the electronic vehicles and all those kind of elements as well. So these are the segments which are growing faster. And on your question on when the entity gets merged, the entity that is getting merged is only around 70% or 80% of the listed entity at this particular point of time. They're not larger than the current listed entity. But the expectation is that it will grow faster because -- as they start doing more offshoring.
The next question is from the line of [ Subash Na ] from [ Treat Capital ].
If I'm correct, you said you will have utilized the capacity of 5,000-plus people by FY '23 end or calendar '23 end?
The expectation is by calendar year, by December 2023, give or take, 2, 3 months here and there, which will basically complete the financial year as well.
So basically, what we are assuming that is more than doubling the capacity. We are at 2,200, 2,300 today, both combined between Pune and...
No. We are at 3,400 today.
3,400. Okay. 3,400 will go to about 5,500 in a matter of 2.5 years. So that accounts -- and you say your optimum utilization is about 86%, we are at 83% already. So kind of manpower addition plans are there for the next 3 quarters, if you can share that?
So we are currently hiring at the rate of around 110, 120 people per quarter net addition, because we also have attrition challenge as well. So the net addition is around 120, 125 in terms of employees and another close to around 75 to 80 in terms of contractors. So that's what we expect for the next -- this quarter, that is the Q2 of this financial year. It will slow down a little bit for the October, November, December. But once again, we expect that the first 2 quarters of the next calendar also should see similar kind of a demand. We can't foresee beyond that at this particular point of time.
Second question is about the margin profile. Once you combine both the entities, can you just give us some guidance about what kind of margin profile we are looking at? Are the margins similar between Pune and other entities or are the margins dip further?
I'll probably have the ability to give you more details, but at this particular point of time -- but as of the March 2021 in our EBITDA numbers, the Pune entity is slightly more than what the listed entity is, but the Bangalore entity is lesser than what the listed entity is. Combined between the 2, it's almost the same. Desikan, do you want to add anything?
Yes, correct. The Pune entity as of 2021 was slightly higher on the EBITDA side, so around 26% was at and ours was around 23.1%. That's the way we ended last year. Of course technology was around 15.6%. That and the combined was around 22.2% as of 31 March '21.
And with this kind of 10% kind of growth on -- last question, can I ask a last question? With a 10% kind of Q-on-Q growth, which is a very strong growth we are talking about, would it also impact our margins? It would give some leverage there?
In the shorter term, yes, it will have some impact on the margins because we need to invest in building that capability and competency. But in the longer run, that is over a 3- to 4-quarter time frame, it should ease out as we build the pipeline and streamline it.
The next question is from the line of Faisal Hawa from H.G. Hawa and Company.
So sir, the engineering R&D. What would be the pecking order of our parent in the world listings? Or how are the top 10 engineering R&D firms of the world? This is 1 question. And secondly, just for the hiring part. Will we be comfortable with hiring much more and having some kind of a bench trend rather than be short of talent in some quarters to come? And how will you state that? And third, do we see any kind of a cultural or any kind of issues in integrating both the forms as far as management structure or the leadership or even the -- because we've had 2 different leaders for both the companies? So -- and we propose to continue with that arrangement as a separate business unit. So do we see any kind of cultural issues in integrating both forms which are actually in very, very different verticals?
Okay. I'll probably go from the last one. We don't see any cultural issues because we have always been part of the same group. So that has never been a concern. And it's not 2 different businesses because the Pune entity, 90% of the business has always been on the quality side of the -- it's been on quality assurance, which is similar to what Expleo Solutions have been doing. So it's not very different. It's only the engineering side of the business, which is different than what Expleo Solutions was doing. So we don't see any cultural challenges there because it's under 1 group and under 1 management. And most of the cultural elements and the policies and procedures are all defined at the group level, which is what -- with some amount of flexibility of what we are able to do in India. On your second question on bench and what we are trying to do in strategizing for building the supply side or building the capabilities or the capacity. We've always had a small bench to cater to our future demand, but the demand nowadays is higher than that. And the challenge always is that you can't keep people idle and the kind of demand that the others are seeing the guys who keep idle are the ones who will get targeted first as well. So at this particular point of time, the objective is to try and keep it as optimum as possible, and that's where we are using some of these third-party consultants and some of them who are able to actually supply us resources on a shorter time frame, even though we have to spend a little more. But our objective is to try and make sure that we tap into the demand to get into the customer, which will help us and grow in the future as well. On the first question on your -- the first question was around R&D and where we are in the pecking order as a global engineering company. We are certainly there in the top 10, but there we are something which I also need to figure out through any of the Gartner reports and others because we are also bigger than some of them, but I don't have the exact pecking out. We are certainly were in top 10 for sure whether we are in top 5 or whether we are between the 5 and 10 is something which I will need to come back to you.
So would India be the first option for any kind of outsourcing that they would like to do?
No, there is already another engineering offshoring center in Romania, which the group has. So depending upon what the languages are and what the kind of capability we are able to build here it will be between Romania and India.
So Romania would be for which language?
All the Eastern European languages and also the -- considering that it's part of Europe, you have German capability and others as well. So the engineering business, the language capability is only that much. It's more the technical capability, which we have to build. This is what we are trying to do as well. And there is really no preference between where the work will have to go. It's a question of where we are able to build the capacity in the fastest possible time frame.
[ In India ] -- it could happen much, much better in India because of the sheer engineering population that we have?
Yes and no. It's the question of whether we are able to tap into that as well because the kind of demand that we are seeing in the market right now, we need to make sure that we stay competitive.
Ladies and gentlemen, we'll take the last question from the line of [ Zohare Nasir ], an individual investor.
My question was mainly around the date of the consolidation. When is it expected to take place? And when is it expected to show on the books? I think the last question you answered, you mentioned that you're expecting it to close by 1st April 2022, if I'm not wrong?
Yes, that's right.
Yes, and we can expect it on the books by Q1 '23?
Yes. That is the current thinking after getting the approval. We'll be doing it around the first quarter of next year.
And just 1 other question that I have is, as of the moment, what is the cash balance on the books? And is there any plan on the dividend front of it?
Now the currently -- we have around INR 137 crores in books. That is the current balance of cash, what we have as of the quarter ending. And if you look at it in the current focus it's more from a successful merger of the entity, 1 subject to the approval of the authority and shareholders. Having said that, we are formulating the dividend distribution policy. So the plan is to get it done before the end of the year, the calendar year '21. And we'll be bringing up to the Board for the discussion for dividend by maybe early FY 2022 will be when the discussion will be.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Yes. Thanks, Sanford. Thank you so much for the active participation and the questions and the interest shown in us. We are looking forward to an even better quarter coming up. And stay safe, take care all of you. Thank you so much.
Thank you very much.
Ladies and gentlemen, on behalf of Expleo Solutions Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.