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Ladies and gentlemen, good day, and welcome to the Mastek Limited Q2 FY '23 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Ms. Damini Jhunjhunwala, AVP Investor Relations, Mastek Limited. Thank you. And over to you, ma'am.
Thank you, Vikram. Good day to all of you, and thank you for joining our earnings call today. Welcome to the Q2 FY '23 earnings call of Mastek. The results and presentation have already been mailed to you and you can also view it on our website, www.mastek.com. To take us through the results today and answer your questions, we have the top management of Mastek, represented by Mr. Hiral Chandrana, Global CEO; and Mr. Arun Agarwal, Global CFO. Hiral will start the call with the business update, followed by Arun providing the financial update for the quarter.
As usual, I would like to remind you that anything that is said on this call that reflects any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to, what we mentioned in the prospectus filed with SEBI and subsequent annual reports that you can find on our website. Having said that, I will now hand over to -- the call to Mr. Hiral Chandrana. Over to you, Hiral.
Thank you, Damini. Thanks, everyone, for joining our investor call and analyst call. First of all, let me start with wishing all of you and your families very best, happy Diwali and best wishes for the festive season. As you would have seen our results, we reported quarter-on-quarter growth of greater than 10% on a constant currency and 20.4% year-on-year growth on the revenue, again, on constant currency. We reported operating EBITDA of 17.2%. Arun will get into a lot more details on the key metrics and financials. Let me spend a few minutes on some of the highlights of the business. I'll also talk about how we are progressing on the strategic priorities and some flavor for what you can expect in the second half of the year and going forward. As you know, there is a lot of geopolitical uncertainties in the U.K, so I wanted to spend a few minutes starting with the biggest business out there, which is the U.K. public sector. We've been in that geography for over 2 decades, as you know, and are very deep rooted in some very critical areas of national infrastructure, particularly with borders, immigration, defense and security. While we understand there is a lot of flux in terms of the macro level environment out there, but our business is very resilient. We have actually announced a few wins out there in some very large frameworks, which position us very well, particularly as the digitization continues. And we are working very closely with the top civil servants as well as key programs and key transformation programs, which we expect to continue as planned. The private sector in the U.K. is also continuing to show momentum and our overall U.K. business we are confident will continue to grow going forward. As you know, we announced the MST Solutions acquisition and concluded that in the quarter. And it's off to a really very positive start. We couldn't be more happier. There is a lot of activity going on across multiple dimensions, particularly as it relates to go-to-market motion and synergies with the rest of the Mastek accounts. So both when it comes to Mastek services taking into MST accounts and Salesforce going into Mastek accounts, we've seen some really positive momentum just in a few weeks. As you would recall, our focus was on 3 or 4 areas when we made this acquisition. One was in the space of health care in North America, where MST has got some really unique solutions. Second is in a new vertical, which is the state and local governments in the Americas. We're now into 4 different states out there and see again a lot of areas where we can replicate the use cases. Account mining was one of the biggest areas where we would benefit. Salesforces as an ecosystem is going to be creating 9 million new jobs in the next few years -- in the next 3 years, actually, and they would be requiring about 250,000 more consultants in the ecosystem. We have some amazing case studies and are very bullish, particularly after the Dreamforce conference that happened last month, where we see a lot of clients actually together and are already bidding for joint deals and winning together along with MST. Overall, our market visibility has increased. We've been recognized by some top advisers, analysts in the Americas, particularly as it relates to ISG. We are part of the Booming 15 list now along with some key players as well as other clients recognize us as a disruptor in the Oracle Cloud space. Our order book backlog year-on-year continues to grow. The demand is cautious, but we see some really strong momentum in larger deals -- larger integrated deals, more particularly. And even though there will be some repurposing of budgets, the areas that we operate in, as you know, is all digital and cloud services. So we continue to see customers investing in those areas going forward as they continue to modernize and move their on-premise verticals to the cloud. As you know, we had presented during our Investor Day last time on some very key strategies, and a key part of that building block is our people. And we are very happy to inform you that attrition has continued to be trending down last 3 quarters. There's a lot of skill transformation and people retention initiatives that continue, and that's, like I've said before, a continuous process as we build our organization to scale for the future. We had announced an innovation and platforms group. And I'm again -- we're happy to inform you that there is -- our first win on that front with the nonlinear assets, particularly in the workforce scheduling space, it's in the Middle East market. However, we believe that this can be now replicated into other markets, including U.S. and U.K. Our Middle East market actually has performed well, frankly, better than what we had originally expected. And we're involved now in some large accounts and deals out in that market as well. Lastly, if you look at our account-focused strategy, we're now in 27 Fortune 1000 clients. We are being very selective in terms of new logos and new clients, where we want to focus on deeper account mining and cross-sell with our service line strategies. And you will continue to see that focus across all geographies. A bit about what you can expect going forward. We believe that while our health care business percentage would have dropped, and we had communicated this last time in terms of a single account in the U.K., we are seeing really strong momentum when it comes to pipeline, particularly in health care and public sector. Our manufacturing and retail accounts also are showing promise. And we believe that even though the data and analytics percentage and the health care percentage has dropped because of that one account, the pipeline that we see in those 2 areas across all geographies, particularly in North America, is very positive. The key will be to execute during the quarter, both in Q3 and Q4 as we have multiple large deals and integrated deals, along with our joint activity with MST Solutions. We just came off a successful Oracle CloudWorld conference as well. Again, these conferences are happening after a gap of 3 years. As you know, 2019 was the last in-person conference. And there's, again, a lot of discussions around the investment Oracle has made in Cerner and the potential of repurposing some of that investment into the health care U.S. market. I'd like to thank all our Mastekeers, employees, all our stakeholders, including all of you on the call, our investors, analysts as well as our customers for their commitment and trust. And I'll turn it towards Arun now for financials, and looking forward to the discussions in our Q&A. Thank you.
Thanks, Hiral. A very warm welcome to everyone on the call. While decks containing details have already been circulated ahead of the call, I will focus on key financial and business highlights on top of what Hiral had covered much more detailing about how our business are growing and what key initiatives have been driven in Mastek. It was an eventful quarter on multiple terms. While we have seen quarter-on-quarter and year-on-year growth in revenue led by both organic business and also accretion of MST for part of the quarter, we witnessed a decline in our operating margin, which is primarily because of increments which we have done across all the geographies and currency headwinds. We concluded our acquisition of MST in the month of August, and as Hiral alluded to, we are experiencing synergistic momentum in Americas as this acquisition strengthened our integrated offering across cloud transformation, architecture, customer experience, data and business intelligence. Key financial highlights for the quarter includes: we have reported revenue of INR 625 crores for the quarter, up 20.4% year-on-year and 10.7% quarter-on-quarter in constant currency. During the quarter, we have seen good momentum building up in our U.K. public sector business and also in Middle East, both in order book and revenue terms. U.S. continues to be an important market. In Q2, U.S. contributed 24% of our group revenue, progressing in line with our Vision 2025, where we want 1/3 of our revenue to come from U.S. as a market. We added 20 new clients during the quarter. And a point to highlight: 5 clients of that 20 had their turnover more than 5 -- more than $1 billion, which gives significant opportunity for Mastek to do further account mining and make them a customer for life. Our operating EBITDA stood at 17.2% versus 19.2% in the previous quarter, a reduction of 200 bps quarter-on-quarter. As I mentioned earlier, it's primarily due to impact of currency and salary increments. However, we continue to invest in sales and capabilities. There are multiple operating levers which is helping us to offset some of this impact as we operated in this quarter and we move into future quarters. PAT stood at INR 86.2 crores versus INR 84.4 crores in the previous quarter, up 2.2% quarter-on-quarter. Our borrowings stood at INR 388 crores as of 30th September, which includes funds which we borrowed for the purpose of MST acquisition. Our gross cash stood at INR 352 crores versus INR 655 crores in the previous quarter. We have discharged all the payments relating to MST acquisition and also released all the final dividends in quarter 2. Our head count stood at 5,810 for the quarter, reflecting a net addition of 257 resources. This includes addition of MST resources as well as we consolidated MST in this current quarter. We will give more details and we'll provide more input as we get into Q&A session. I would like to thank all of you for your continued support and trust in Mastek. Wishing you all a very happy and prosperous Diwali. Going back to moderator to open the house for Q&A session.
[Operator Instructions] We have a first question from the line of Baidik Sarkar with Unique (sic) [ Unifi ] Capital.
Am I audible?
Yes, you are, Baidik.
Lovely. I would like if could just take a step back and shed some light on how the various categories is moving so far and how the top line number are doing. And if you could please start with an update on when we expect some kind of acceleration in the U.K. public sector? I understand from your opening comments that you drew reference to a large -- obviously, a large deal there. So yes, when -- by when should we expect an acquisition there? Followed by a comment on the Oracle practice, how have growth rates there been like? If you could please quantify a broad range. That will be helpful. And I call up Oracle practice due to a simple reason that the commentary from Oracle itself has been so encouraging and aggressive. So it will help us see how as a vendor in the U.K. system we're keeping up. And lastly, if you could throw some light on the few Salesforce practices that you keep acquiring with this new mandate. How much is MST largely project implementation oriented and how does scale up here look like?
All right. Thanks for the question. I mean, I know there's 2 or 3 parts to it. Just to clarify, your first point was on the U.K. public sector, right?
That's right.
Okay. Right. So yes. I mean, if you look at it, outside of some of the large frameworks that we have announced -- and these are very competitive framework, right? And one of them, which is the technology services Tier 3, we're actually officially in the top 2 among the top 15 suppliers as part of the data and analytics framework. We are also expecting a significant amount of work in the medium term. Having said that, in terms of the near-term wins and some of the key elements of the U.K. public sector, we're actually continuing to win on 3 or 4 fronts, right? One is in terms of the future borders and trade. As you know, our business is critical -- managing some of the critical infrastructure. So for example, we process about 5 million visa applicants in any given year. We are actually involved in protecting some of the irregular immigration, where we process about 25,000 cases every year. Some of these typical elements continue to get modernized and digitized and these systems are very critical for the future of the government as well. Even in the government -- and even in the health sector out there which is under the government, where we saw one particular program dip, and that obviously impacted our Q1 and Q2 from a health sector perspective, but we are continuing to see momentum in a few other areas, particularly in the shared services unit and some of their data processing services. And we've announced a couple of wins out there as well. In the U.K. public sector, we also have a council, state and local government, where we're working with about 28 or 29 city councils. And we used to do primarily Oracle cloud work out there in the past until about 6 months, 9 months ago. Now we are starting to cross-sell the digital services and winning more larger integrated deals. In about 5 of those councils, we're actually starting -- or we have actually started in 2 or 3 of them architectural assessments. And we believe that some of those councils could be quite interesting going forward as well. So while you have seen the U.S. business improve from a share perspective, and that's in line with our strategy, our U.K. public sector, particularly our secure government services, the SGS services, will continue to grow. And we're actually seeing wins even in the first 2, 3 weeks of October here as we get into Q3. So that's as far as the U.K. public sector is concerned.
So the deal wins in October should reflect by Q3 itself. Is that a fair assessment?
Yes, the 2 wins that we've had are wins where we would start to ramp up in November itself. These are wins in our existing accounts in different divisions. And that will continue to build in Q3 and Q4 also. As you know, the Oracle business that we have as it is, is multifold. So I just want to split out a little bit because it will give you some flavor. The Oracle cloud commerce -- and there has been enough public announcements on this. Oracle has been deprioritizing some of the cloud commerce elements, which is the CX part of the Oracle business, right? And we've had some exposure out there, which has impacted some of our Oracle components. Having said that, the Oracle cloud ERP, supply chain, HCM and some of the elements of the mid- to back-office transformation is something that they continue to grow, and we continue to see positive momentum. So while the CX part has definitely been impacted, the rest of the Oracle business, which is our core ERP, HCM, continues to build, right, as we look at larger deals. Now it's an interesting kind of timing for us because -- this is segue to your third question. We now have an additional ammunition with the Salesforce commerce as well as our Salesforce CX practices. So in our existing incumbent accounts, we're now able to guide them through the front office transformation journey, whether it is in the Salesforce CX, CRM space or even in some of the new MACH alliances, which are the headless commerce areas, where some customers are investing. So we're seeing it as a challenge as well as an opportunity there on the commerce space because now we have an additional stronger practice where customers are investing in. Lastly, the MST acquisition -- and we've shared some more details in the deck as well. We are really excited about this entire new vertical that has opened up. Normally, it would have been very difficult for us to get into state and local government sector. But the spend out there continues to increase in digitizing multiple elements of economic and land development, water resources, licensing and permitting. And these are some very unique use cases, right, transportation, health services, where we are able to take our capabilities in Salesforce and penetrate into the state and local government. And hopefully, we can build from there and replicate those use cases as well, including some of the Blue Cross Blue Shields, where we see some good use cases in the health sector, both in the provider and the payer market as well. So hopefully, that covers the U.K. public sector, the Oracle as well as the Salesforce question.
Yes. But I was wondering if you could quantify some of the expected growth rates here, at least with MTS. I understand ramp-up in U.K. will happen. But just to give us a ballpark on how the scale-up in MTS could be like. They disclose -- I think they were at $30 million last June. So what's the run rate we're looking at here?
Yes. So we don't share the split of the acquisition numbers. And like you said, when we acquired, they were $28 million, $29 million last 12 months prior -- the prior 12 months and June timeframe. We expect the growth in high single digits with MST Solutions quarter-on-quarter. And the ecosystem is fairly large, as you know, with the Salesforce. Salesforce is -- as we had shared last time, is a much more broader platform with the customer 360 degree focus. So there is sales cloud, service cloud, marketing cloud, integration cloud, analytics and some very specific industry solutions that MST brings to the table as well. There is a platform called Vlocity, which is where we build our industry solutions. So in that, we continue to see high single-digit quarter-on-quarter growth. Obviously, it's on a smaller base. And we're seeing growth across geographies out there, not just in the Americas. Arun, if you want to add anything on the numbers.
Absolutely, it's covered, Hiral. And Baidik to your point, while in U.S. it is primarily focused how we have done the acquisition, but we are seeing a lot of good synergies coming out of U.K. and other markets as we are building it up. So we are very positive both from the market opportunity perspective and from the capability which we have as a company now.
Sure. Arun, on the margins, could you break up the constituents within our other expenditure that saw this 200 bps at an EBITDA level. And despite the depreciation, is it just an effect of MST acquisition? Or was there something else there, because it looked rather sharp? And would you reckon we're at bottom EBIT levels? Or should we wait for Q3 for full impact of the integration to play out?
You're right, Baidik. Depreciation is the reflection of the acquisition as per Ind AS and IFRS. As we know, there's a intangible which has to be created on every acquisition and you need to amortize it, right, which has led to increase in depreciation, which will continue. But that's part of the acquisition. And margin -- as you saw, other expenses is the reflection of subcontractors and other related costs, right? As we're ramping a couple of accounts, including public sector, which includes secure tiered resources, you need to hire subcontractors because there you get those talents rather than in the employment market. So it's a combination of both which is getting into it. But from the operating EBITDA perspective, which is a consummation of everything plus and minus, which is moving across. As I mentioned earlier, it's a combination of currency and also the salary increments which we have given across geographies. Otherwise, everything else is balancing each other out.
So just one last thing from me, Arun. This is really a comment for your Board and, obviously, for the CEO and the CFO's office. Look, I understand M&As will be a key component of your growth and your new value creation over the next many years, right? But even keeping that in perspective, we cannot discount the 50% correction that your own stock has taken because this is now at multiples that is probably lower than the deals that you would enter into the market to fuel your own organic growth ambitions. So in a nutshell, the point I'm trying to drive at is that from a financial management perspective, buying back your own stock is something that you should consider, because if you are indeed headed for $1 billion, say, by FY '25 or FY '26, the risk to reward that your own stock offers is possibly better than, say, the smaller [ back fledging ] ones that you might be seeking to acquire. So this is a comment I wanted to leave with your Board. If you have a comment on this right away, I'd love to hear it as this is a formal suggestion for your Board.
We have noted the position, definitely. This is probably one of the factors which is always discussed. But again, the capital allocation how we believe will constitute to better shareholders' return. But point taken, Baidik.
We have next question from the line of Sarvesh Gupta from Maximal Capital.
So first question is what was the MST contribution in the quarter in terms of the revenue because we are trying to analyze the organic versus inorganic growth?
So again, very quickly. As we mentioned, again, the acquisition which is done in the month of August, where we have consolidated numbers, we are not providing -- or we don't provide the breakups, but a very high level, which you can take as a number. Organic business has grown quarter-on-quarter and year-on-year. Quarter-on-quarter growth is in low single digit and year-on-year growth is in double digit as a reference. However, we are not providing breakup, and hence, will not be able to give you specific breakup of MST and our revenue number.
Okay. But for how much time has it been consolidated? Can you at least tell that?
It's part of the quarter, as I mentioned. The consolidation has been done effective August, so part of the quarter.
2 months?
Approximately.
Okay. And on the health care key win, where we didn't sort of -- that win has gone back. So is it expected to come back? What is the current status? Will it come back? Or is it just gone and now we have to start again from the scratch as far as that key deal win is concerned?
So Sarvesh, health care -- of course, there are multiple components to our health care business. As you know, we do business in Middle East, in the U.S. as well as the major clients in the U.K., which we talked about last time. And that particular health care business has 4 or 5 divisions, right? There is an improvement division. There is a digital division. There is a shared services division. There's an Indian division. And those departments and leadership have been consolidated, right? So the way we are approaching that account is slightly different. It continues to be a key part of our strategy. Our pipeline is actually healthy. The decisions that we are going to take have slowed down in the last 1 or 2 quarters because of the change in leadership and reprioritization, right? The win that we announced in the collections, which is the data processing services, which is to look at taking some of their legacy environment into the cloud and also building on the data access environment and some of the trusted secure access that they want, right, for critical data, that was the win in that same account. So we're seeing different elements of pipeline now. The deal that was envisaged as it was constructed about 9 months back, is now being implemented with a different approach. And like we had mentioned, right, it would come in phases with a much spread out sales for that particular account. However, we continue to be very bullish on the health care sector as an overall industry vertical, right? We've actually run some accounts in the U.S. Actually, a very interesting case study that we published recently was along with MST, where they have completely revamped a member portal and mobile experience of an integrated patient going through -- and this is a public case study, so I can name the customer, Banner Health, which is one of the leading payer providers in the country. And we've actually not just won the deal, but we are executing that with some really good feedback from both Salesforce as well as from the customer. So health care in North America is actually a big focus area as well. As it relates to the health care account in U.K., we do continue to see opportunities where they are now much more willing to do offshoring, which they did not. And so we are sort of constructing some different engagement models with them as well. So hopefully, that covers it for this.
Understood. So do we expect the share of health care in our revenues which has seen a large -- do we expect that to improve that to the medium sort of a level? Or it is going to be the new normal now?
No, we expect -- it's a good question, Sarvesh. In fact, we had shared our vision for health care and life sciences business to be 30% as part of our vision in FY '26 game plan. We are still very confident that, that's the mix that we're aiming for. In fact, MST Solutions' business has an element of health care, as you know, and we're seeing good pipeline over there. So we will continue -- so I would say that this is probably like a bottom level on that mix. You'll continue to see that going forward grow. And hopefully, we can get to almost 30% of our business from health care and life science.
Understood. And Arun, just one last question if I can chip in. It is alluding to the previous participant's question also. So we've seen like -- even if we talk about high teens, we are probably at the bottom range of the high teens in terms of the margins. So assuming currency stabilizes, pound stabilizes at this level, do you see this being the bottom of the margins for this year? Or do we expect any further positive or negative levers on that particular margin levels where we have reached?
No. Sarvesh, a brilliant question. Definitely, all our efforts -- there are multiple operating levers, including utilization and other specific ones where the management is working very diligently. Subject to currency, we believe there's more than enough room and opportunity to improve margin profile. And we expect those improvements to start reflecting quarter 4 onwards.
[Operator Instructions] We have next question from the line of Jay Daniel with Entropy Advisors.
Yes, sir. I just wanted to know quarter-on-quarter has there been a reduction in head count net of MST? Because head count moved up by a net of 257 from 5,553 to 5,810 and MST brought in 325.
Yes Jay, there is a reduction in the head count because as we have invested ahead of the curve and we are doing very tactful hiring to replace the attrition and as -- to hire for the future growth wherever we are seeing the pipeline. But we are not backfilling the attrition where it is not matching with the pipeline at the moment, right? So there's a net reduction other than MST.
Okay. And in the previous call, you had alluded -- I mean, I think I missed this -- alluded to 2 large $30 million to $50 million deals in the previous quarter call that was on the verge of conversion to orders. Where do they stand now? And over and above this, there was a couple of more deals in the same range expected in the next 3 to 6 months? Where do they stand now?
So Jay, just to, first of all, clarify the previous point, right? We had continued to ensure that we take freshers and trainees last quarter. And so our focus there is to ensure they get deployed and get them skilled for the demand that we're seeing. And so we thought it would be prudent to first integrate the MST acquisition, which also came with some interesting cloud engineering and architecture talent as well as the trainees that we had taken on board. But we expect to see the head count continue to grow going forward. As far as the deals are concerned, we had announced the digital specialists and programs framework last time. And that was the last quarter announcement that we had made. I think that's what you're referring to. This is where we are now emplaned on the DevOps space as well as the development services in U.K. The 2 new framework deals that we've recently announced actually are in newer areas: one in the strategy and consulting area, where we will be getting involved in the transition and transformation of the state, particularly in the U.K. public sector, not just in the Home Office or in the Borders and Immigration, but other areas as well. And the second area is on the data and analytics framework, which is again reported publicly. This is where the entire data life cycle is getting looked at. And we're among the 29 suppliers. So it's a very large space of providers. But we have a fairly good niche when it comes to analytics and cognitive data solution areas, where we believe there is a huge potential as well. So those are the 2 new frameworks that we're involved in.
So these are the $30 million to $50 million deals?
So we are being cautious, to be frank, and not including them in our order backlog and order book, right? We would like to be on the conservative side and make sure that as we start winning specific SoWs in specific areas, only those get counted in our order book. So you will not see some of these larger deals and frameworks that are being counted in our order backlog. Having said that...
These are the 2 deals you were mentioning in the last quarter. That's what I wanted to know.
So these are 2 new framework deals.
So the $30 million to $50 million deal which you mentioned last year, what is the status on that last quarter?
No. So if you -- I don't know which specific deal you're referring to, but the digital specialists and programs deal -- there was an area -- are you referring to the U.K. public sector or the NHS?
No, no. This was given out by you in the last quarter con call.
Yes, yes. So this is the collections space where we actually have gotten selected in the -- the data processing service that you see out there in our announcement, is that win. So we've actually concluded that. And that will continue to ramp up for the next 12 months. So that...
So they will be in the range of $30 million to $50 million?
It's a GBP 20 million value.
Okay. And you have some more in the pipeline. That's what you had mentioned last time over and above these 2, which were to be converted in the next 3 to 6 months.
That is correct. So those are still in play and those are both in the health sector as well as in the future borders and immigration sector. One of them has been constituted as a $10 million deal, not the $30 million deal that we originally envisaged. And the remaining ones in the clinical space as well as in the HMRC space are still in the pipeline. So that will continue -- our pipeline has actually continued to improve from the previous quarter. So we are being very cautious in terms of qualifying certain new accounts and new logos as well. But these deals, as you can imagine, takes time. And we're still in play on those deals.
We have next question from the line of Pratik Kothari with Unique Portfolio Managers.
Sir, a couple of clarifications. On the MST, the margin we had mentioned earlier were 18%, 20%. This was after all synergy benefits that will come in maybe earlier down the line? Or was it preliminary margin?
So Pratik, as we mentioned, the margin is in line with what Mastek margin is at the moment. So it's quite similar to what Mastek organic business was delivering. With synergy, we believe a better progress both in terms of top line and margin. But that's a further development. But as we speak, the margin profile is quite similar.
Okay. Fair enough. And sir, this profit number that you mentioned, INR 85 crores, INR 86 crores, I believe this includes exceptional items, right? Am I missing something here?
No, it's right. There's an exceptional item, both from the income and cost perspective. We have sold one of our noncore assets, which is a property. There is a onetime gain associated with that, which is included into the numbers. And there is onetime acquisition-related costs as well which we have incurred. So both has been included into exceptional items.
Sir, earlier, when we made the Evosys acquistion, starting, I believe, for a year or more, we used to separately call out what our organic growth is, organic margins are versus what Evosys did. Why not follow that process this time? I mean -- because we're trying to get a sense of how our organic business is doing. At least in dollar terms if we include MST, the numbers don't look so encouraging. So why not follow the practice that we used to do a couple of years back.
So again, there's no specific negative sentiments on that side. Just to let you know, last year when we acquired Evosys, the integration was not planned to be done initially, and hence, we were giving that information separately because we were running as a separate business. This is a different -- a smaller range of the acquisition and integrated from day 1. So we have a joint go-to-market strategy. We are working on -- we have got 5 synergistic deals where we have been successful, though smaller in size, but there's a good ramp-up opportunity out there. So now bifurcating numbers is going to be much more difficult. While Oracle that we acquired, it was a completely -- which Mastek was not doing at all, and hence, we reported it separately. There is no other reason. And I mentioned earlier in one of the remarks saying what is the organic growth. So we'll continue to give those guidance how organic business is moving. But it's more integrated business and offerings now.
We have next question from the line of Mohit Jain with Anand Rathi.
Sir, I have just one question on the U.S. side. So while our commentary remains positive, but numbers do not move there. Like if we remove the contribution for inorganic, this quarter also seems flattish. So what is happening in U.S.? And this is not a quarterly question, but more from last 5 quarter perspective. And what challenges are there in growing in the U.S. while our deal win, et cetera, remains healthy as far as commentary is concerned?
Yes. Mohit, let me start and Arun can add. But the account mining strategy out there, which we have shared in the last 2, 3 quarters, is starting to now yield results. It has taken longer than we expected, to be frank, because when we structure our teams, we are looking at client partner, program management, delivery management and a different rhythm when it comes to some of these enterprise accounts and larger customers. Having said that, one of the metrics that we will start sharing going forward is our top 25 accounts in the U.S., right? To give you some flavor, that top 25 accounts contribute to roughly about 70% of our business in the Americas. And this is now even consolidated with the MST, which brings in a couple of accounts as well. And we are tracking that metric very, very closely, right? Because otherwise, we will always be in this business of opening new logos, which is an important part. We want to focus more energies on directly going to the customer. Historically, as you know, for the Oracle Cloud side of the business, we were dependent on Oracle to provide us the pipeline. So the change that we are making there, which has, again, taken a little bit longer, but we are seeing good leading indicators in the pipeline, is now going directly to the customer, right? And that's not an easy change, particularly when it comes to the entire service portfolio that we have, right, which is digital engineering, data, cloud implementations as well as digital experience. So those 2 elements are critical parts of the change: one is account mining of the top 25 accounts and second is the direct go-to-market of some of the large enterprise accounts. And lastly, we are seeing a joint integrated synergy now already with another ammunition that we have in Salesforce. So if you look at what we have talked about in the past, we're truly able to make an integrated lead to cash deal happen, right? Because the front office being Salesforce, the back office being Oracle Cloud ERP or HCM and the digital engineering work and the data work that we do in the middle. So now we're able to construct those larger deals. We feel confident that we can take it to more Fortune 1000 customers, which, again, is a focus area and we've seen that increase. I think our Fortune 1000 list has increased by 2.5x from the year before. So those 2 or 3 elements of our strategy has taken longer to yield results, but we are very confident that the U.S. market, which is now 24%, will continue to move in that direction where eventually we will be at about 1/3 of our overall business.
So by when do you think you can fix this piece? And what should we expect in the next 2, 3 quarters? Like how much time could there be before we see meaningful growth in U.S.?
You will see this in the second half of the year as well, Mohit, in terms of the U.S. growth quarter-on-quarter as well as year-on-year.
[Operator Instructions] We have next question from the line of Sachin Kasera with Svan Investments.
Yes. My 2, 3 questions. One was on the leverage and the balance sheet. So we have one more round of, I think, Evosys stake increase due in the H2. So will that increase the net debt on the balance sheet by end of the financial year?
No Sachin, we will be using our cash and bank balance to acquire the balance 10% for this year. But there is no debt which is planned for this round.
Yes. Because from what I could see in the presentation, more or less now we are 0 -- the cash -- net cash has become 0 as of September post the current acquisition, isn't it?
Yes. At the moment, yes, Sachin. But we have good, healthy cash generation, which we expect continue to happen because the quality of revenue is good, collection time lines are improving, though there's a lot more work to be done in H2. We believe with those organic cash coming in, will be good enough to take care in terms of this 10% acquisition of Evosys.
Sure. The other one on this vision to 2025, '26 that we have put out in the presentation. One -- you was in the top 3 in terms of the growth rate. So one, does that include organic, inorganic both when you say you're in the top 3 in the industry? And secondly, when do you think we will start reporting those type of numbers?
So Sachin, we want to make sure that we're comparing ourselves with the top 10 in that mid-market space. And while there's been some consolidation out there, we want to see that as a medium- to longer-term journey. That is an important metric that we have already started tracking internally. We don't report that necessarily externally, but we can look at that going forward in the next fiscal onwards. But just to give you some flavor. We actually have incorporated that metric even as part of the leadership team's variable pay percentage. So it's a very critical metric there because it's a true part of our vision, where we want to be in the top 3 in terms of growth year-on-year. Our customer focus as well as our employee focus are equally important as far for as that vision because we believe if you get those 2 things right, then the growth will all be -- will automatically happen.
Sure. And the last question was on this $1 billion vision. So if I do the math, unless we are looking at some significant debt on the balance sheet or some significant dilution, organically, that looks like a very, very tall ask. So if you could give some insight, that, to reach this $1 billion, will we need to do some significant dilution of our equity because organically for the acquisition free cash flow looks quite challenging vis-a-vis the current status where we are?
Yes. So Sachin, that is a fair comment. As we have communicated even in our annual report, right, we're looking at that vision and goal in the second half of the decade. While we understand that there will be some level of macro uncertainty that will continue, right, in the environment, but we have the ingredients and the recipe, right, in terms of capabilities as well as now increasing market visibility to aim for that. So we want to still aspire and be ambitious towards that vision. We've communicated that will happen sometime in the second half of the decade. Having said that, right, it will be a combination of organic and inorganic, and it's not going to be clearly an organic play. There are certain areas we are continuing to build, particularly in the data space. We had communicated that, that's one of those areas where both organic and inorganic is going to be a critical component. What we saw in infrastructure and what we saw in applications in the last 20 years is going to happen with the entire data continuum, right, right from discovery to observability and everything in between where the data is moving to the cloud. We won a very interesting engagement, where we replaced a Tier 1 provider on the AWS data cloud stack recently, and we're getting into Snowflake in a couple of accounts in the U.S. as well. So those types of newer areas which we did not have in the portfolio will be important both from a build and partnership perspective, in addition, of course, to our inorganic plans.
No, I understand, but my question was a little different. I was saying for the inaugural part of this $1 billion, will the cash generation be sufficient? Or will we -- because when we do the numbers, even we're not -- it looks like either we'll have to take some debt on the balance sheet or you'll have to do some good dilution of equity? Otherwise to be able to generate resources for inorganic, this $1 billion looks a little challenging given by whatever that we are indicating. That was my, sir, question.
No Sachin, you're right. So there will be a combination of both: one is healthy cash generation, which is part of the plan of the organization. We expect raising capital as well at the right time. So initial -- any tuck-under acquisition can be done with the help of a combination of internal cash and the borrowing. As we get into a little larger size, a combination of acquisition -- we will do a capital raise at the opportune time. Maybe the current timing is not the right time that we look for and the right time will be meaningful.
We have next question from the line of Ravi Naredi with Naredi Investment.
Sir, my question is quarter 2 employees cost rises 10% versus quarter 1, while no revenue rises in U.K., Middle East, while U.S.A. rise only INR 107 million (sic) [ INR 107 crores] to INR 151 crores, sorry. Then why the employee cost, INR 31 crores, rise so much in this quarter 2?
I mean, again -- maybe it's not comparable apple-to-apple because we have done the MST acquisition, and all the equivalent lines in employee expenses and others have gone up because of MST inclusion as well. So both revenue and cost has been changed accordingly.
Understand. And sir, what is the target of U.S. top line in next 3 years? And what is in your mind? That is the main question.
Yes. So Ravi, we had communicated and we'll continue to drive towards that journey, where we would like our U.S. business to be roughly 1/3, if not more, part of our overall business, right? So right now, in the latest quarter, we are at 24%, a little over that. And we believe there is more headroom there to get closer to 35%.
We have next question from the line of Chintan Patel with Satco Capital Markets Limited.
Sir, our margin is continuously decline. So is it deteriorated due to the consolidation? If it is yes, then what would be the sustainable margin post consolidation for FY '23 and going ahead?
Yes. Chintan, our margin, as I mentioned earlier, the reduction which you're seeing currently is a combination of 2 things. One is increasing cost of salaries, including the increments which we have done during the quarter. And also because of the currency headwinds, how GPB-INR is moving along is also impacting our overall margin. However, we believe -- high-teens has been our aspiration and our endeavor is to continue to build on that. And as I mentioned, quarter 4 onwards, you will start seeing the positive movements on the back of operating levers. And definitely subject to currency, because currency is something which we don't control.
We have next question from the line of Chirag Kachhadiya with Ashika Institutional Equities.
Sir, I have a few questions. Like whatever the situation is there in Europe and particularly U.K., how we're protecting ourselves from this? Because every day some new news comes from Europe geography with -- and new countries. And particularly in the last 2 days, the incident of U.K. -- the geopolitical situation is very uncertain over there and ministers resigning and all. So is there any strategy -- alternate strategy we put in place to protect ourselves even in worst case scenario if anything happens?
Yes. So Chirag, let me maybe recap a couple of things out there in U.K. because it's continuing to be a -- it will continue to be a very critical market for us. Clearly, we're observing some of the geopolitical scenario, and some of that has been around for the last few months as well, as you know. We work very, very closely to -- with the multiple levels of civil and senior services. And while there might be some ministerial changes, the people that we've worked with and are working with will continue to be doing critical roles in these transformation programs, right, whether it's national security, whether it is borders, some of the trade-related aspects and immigration as well. Some of the type of work that we are doing, biometric data matching, exchange, in terms of validating some of the systems, right, is fairly cutting edge and those will continue. Now having said that, right, we want to make sure that we continue to have a risk mitigation plan. But the areas that we are in are very deep rooted. We actually believe that it is going to get very tough for new competition to come in some of these areas that we are present in. And while there will be some element of potential realignment or reprioritization on some of these initiatives, the areas that we are working in will continue to grow. So we could potentially see that as an advantage when we convert some of our long-standing relationships and presence to build on some of these systems that we have continued to support, right? Having said that, Europe, which is the non-U.K. part, right -- we have a small presence in Europe as well. There, there's definitely a delayed decision. So we have actually put more focus on the U.K. and the U.S. market. And like I said, our Middle East market has shown good promise as well. One of the interesting things that we have observed recently in the last 3 to 6 months, and you'll hopefully see some announcements on deals related to this, is the account that we had opened in Europe and some of these large manufacturing accounts. These are 10 billion, 15 billion accounts, if not more. They have large presence in Americas as well, right? So we are taking a very global account strategy. In fact, we have 3 deals in the Americas with customers who are actually headquartered out of Europe, but they are driving large North America rollout, right, whether it's in the Oracle space or in the digital engineering space. So we are adopting different strategies out there even for some of these accounts that we have out there. But we are very confident about the public sector business in U.K. We understand there is geopolitical stability issues, but our areas, we are very confident we'll grow.
We have next question from the line of Parag Brahande, an investor.
Yes. Can you hear me clear?
Yes, please go ahead, Parag.
Yes, yes. I want to understand why there is reduction in the client addition?
So let me take that. Arun, if you want to add, please jump in. So Parag, this is something that we have been very consciously been communicating as well as it's part of our strategy. If you look at our side of business, the number of clients that we have is way too many, to be frank, right? Now that's an advantage in some ways, but there is also a long tail of clients, right, where some of those customers may never grow beyond a particular point, right, where we have done an implementation or a project and then it tails down. So we're taking, very consciously, calls on deeper account mining, where we are repurposing some of our top talent globally, right, in the region as well as in our global centers to focus on those top 40, 45 clients. We've identified globally these top 40, 45 clients, which will drive a good part of our growth strategy. So you will see us being much more selective when it comes to new client additions. And this is taking a medium-term view as well, because we believe the wallet share increase in our existing clients is going to pay off much more dividends as well as higher quality revenue. And this holds good for even regions like Middle East, where we now have identified 10 accounts where we will grow there, right? U.K., where we have identified 10 accounts. Europe, we've identified a few accounts as well as in the U.S. about 20, 25 accounts. So I think that account mining rhythm is going to be critical. Having said that, we will continue to go after larger, more integrated deals where you see potential -- downstream potential in the customer. If we see that it's going to be just a project of 300k, 500k and that will be all that we do with the client, we're being more careful and judicious about taking on new clients. Whereas, if we see that they're going to be a strategic partner, where now with our Salesforce capabilities, Oracle Cloud, data and engineering capabilities on the digital side, we can be a much more strategic long-term partner, then we would go after it. So it's a design philosophy, where we believe a number of accounts is not going to be a metric, but revenue from our top 25 or top 50 accounts, revenue from accounts which are greater than $1 billion in revenue -- you would have seen that now we are increasing our number of accounts when it comes to companies which are greater than $1 billion. So that's a good metric that we'll continue to report going forward.
We have the last question from the line of Jay Daniel with Entropy Advisors.
Yes, sir. This is regarding that $1 billion target. Now you're saying it will be in the second half of this decade, while investors are assuming it will be '25, '26. And the second thing -- second part of that thing is, how personally invested are you in achieving this $1 billion target? I mean, how much of -- I mean, as investors, we would like to know whether you're on our side of the table as far as your resource, et cetera, are concerned, which are linked to this $1 billion -- achieving this $1 billion target?
So Jay -- there's some background noise. Okay. All right. So it's a good segue for us to actually maybe make some closing comments as well because it's a good question. So first of all, we are -- the entire ELT, which is our executive leadership team, and our management is very committed to our $1 billion vision, right? We have communicated that it is going to be in the early part of the second half of the decade, which is, hopefully, in the first 2 years, right, of the second part of the decade. And we believe that there is going to be a lot of activity that we collectively need to do, right? Because there are certain market factors we may not be able to control, but there are many factors that we can control, right, as an organization. There is elements of newer areas that are going to come in. We've talked about some of them, whether it is data and automation, whether it is the Cerner acquisition that Oracle made and how we make a bet on health care in North America. So some of those strategies that we have shared in the past. While we are making -- tweaking -- we are tweaking those strategies based on the market. But fundamentally, we have belief that those strategic big bets that we had outlined are the right bets that will take us going forward, including our inorganic strategy, right? I'm personally very committed, to your point, and looking forward to this journey, because it is not going to be easy, right? We're trying to -- what we're trying to do is what Mastek has done in 40 years, from a time frame perspective, is to do that in the next 4 years. And if you look at it, the market opportunity of customers -- one of the big things that customers have learned during COVID is not softening investment in digital engineering and cloud transformation works, right? Because some of the customers that didn't do that missed out on the opportunity. Now our entire business mix is in that area. And if we continue to build, partner and buy the right assets and build the right capabilities and, of course, execute that with a lot of rigor, we see that, that's a journey that is possible. So with that, I think the full commitment on my side exists. We obviously don't talk about specific elements of ESOPs, et cetera. But as far as the journey is concerned, the entire leadership team has done a fantastic job. It's not an easy environment and dancing with excitement. We are obviously coming off of 2 years of challenging times for people personally. And our Mastekeers have shown tremendous resilience, right, and the spirit of what they stand for. We recently celebrated our 40th anniversary. We have welcomed the MST Solutions team as part of our family. Culture for us is a very important part of our fabric, where we are always going to be true to our values. And the market potential definitely exists, right, with the room that we have in Americas, in health care, in some of the newer emerging technologies as customers continue to go in the digital and cloud journey. So with that, hopefully, that covers, Jay, the question you have. And I'll turn it back to the operator.
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference back over to Mr. Hiral Chandrana for closing comments. Over to you, sir.
Thank you again. As always, we enjoy these questions because we learn a lot as well in terms of how our supporters, investors, analysts are thinking. I do want to once again wish all of you a very happy Diwali and festive season with your families. The environment and the demand outlook is still strong in spite of some of the macro level uncertainty. And we will continue to make progress in our strategic priorities and continue to update all of you on specific areas of progress. But I want to reemphasize the support and the commitment that all of us have to making this vision possible. And again, thank you to all of you on the call as well as our investors and analysts, who continue to support us through this journey as well. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Mastek Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.