Saksoft Ltd
NSE:SAKSOFT
Saksoft Ltd
NSE:SAKSOFT
Price:
277 INR
-0.95%
Market Closed
Updated:
May 3, 2024
Section:
Earnings Call Analysis
Summary
Q3-2024
Q3-2024
Company Achieves Growth, Sets Ambitious Targets
The company's revenue rose to INR 192.84 crores in the third quarter, a 12.9% year-on-year increase, with a 13.5% increase in net profit at INR 22.54 crores. The revenue growth for the 9-month period was 17.2%, reaching INR 566.73 crores. The U.S.A. contributed to 43% of revenue, with Europe at 23%. Management aims for a 25% year-on-year growth, with an organic growth target of approximately INR 150 crores and inorganic growth capped at INR 50 crores. Increased sales team investments are anticipated to impact profits for the next 6 to 8 quarters.
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Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months FY '24 Conference Call of Saksoft Limited. [Operator Instructions] I now hand the conference over to Mr. Purvangi Jain from Valorem Advisors.
Good afternoon, everyone, and a warm welcome to you all. My name is Purvangi Jain from Valorem Advisors. We represent the Investor Relations of Saksoft Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the third quarter and 9 months ended of the financial year 2024.
Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Let me now introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Aditya Krishna, Chairman and Managing Director; and Mr. Niraj Kumar Ganeriwal, Chief Operating Officer and CFO. Thank you, and over to you, Aditya sir.
Hello, and good afternoon, everyone. Welcome, and thank you for joining our quarter 3 and 9 months ended 31st December 2023 Earnings Call today. Let me first give you a brief introduction of Saksoft for the sake of some of the participants who may be new to the company. Saksoft is a digital transformation partner that assists its customers to automate modernize and manage IT systems through a combination of domain-specific technology solutions and solution accelerators from consulting support. We have been in business for almost 2 decades now with offices across 16 locations, covering U.S.A., Asia Pacific, U.K. and Europe. We have an associate strength of 2,000 plus. The key verticals that we operate in are fintech, high-tech, transportation logistics, digital commerce and health care. The interconnected nature of the verticals mention or address a huge market, which also facilitates us to cross-sell and upsell service offerings to our clients. These verticals are supported by horizontal service offerings, spanning analytics, cloud solutions, legacy modernization, intelligent automation, application development and testing. As a company, we offer a comprehensive suite of digital transformation services. Now moving on to the quarter under review. Despite facing headwinds in the U.S. market, I'm pleased to report that we managed to keep our revenues flat on a quarter-on-quarter basis. Our EBITDA margins took a little bit of a hit because we chose to invest more in improving our sales engine. This decision is part of our long-term strategy to reach a revenue target of USD 500 million by 2030. On the front of sustainability, we are proud to reiterate that ESG remains one of our major objectives at Saksoft. Now I would request my colleague, Niraj, to give you the financial highlights for the quarter under review.
Thanks, Aditya, and thank you, everyone, for taking the time and joining our earnings call today to discuss the results of the third quarter and 9 months ended of the financial year 2024 under review. For the third quarter of the current financial year, the revenues were reported at around INR 192.84 crores, representing a growth of around 12.9% year-on-year. The EBITDA stood at INR 33.03 crores, which grew by 20.38% year-on-year, with EBITDA margins reported at around 17.1%. The net profit for the quarter was INR 22.54 crores, which grew by around 13.5% year-on-year and PAT margins at around 11.7%.
For the 9 months ended 31st December 2023, the revenues were reported at around INR 566.73 crores. This represents a growth of about 17.2% on a year-on-year basis. The EBITDA for this 9 months was at INR 103.38 crores, which grew by 36.7% year-on-year and EBITDA margins were at around 18.2%, with a growth of 259 basis points. The net profit stood at INR 72.97 crores, which is a growth of around 28% year-on-year, representing a PAT margin of about 13%. Now coming to the revenue split by geography for the 9 months ended 31st December 2023. The U.S.A. contributed to 43% of our revenues. Europe contributed to 23%, while the remaining 34% came from Asia Pacific and other regions. The mix of on-site and offshore revenues, on-site revenues was at around 45% and offshore at 55%. The revenue split amongst the verticals for these 9 months is as follows: Fintech contributed to about 34%, Telecom and Utilities to about 20%, Transportation and Logistics contributed to 12%, Public sector 4% and the balance came from Retail and Healthcare at around 8%.
Coming to some of our customer metrics, Saksoft has around 15 customers of $1 million-plus revenue. The total employee count at the end of the quarter stood at 2,102 out of which how 1,890 were technical with the utilization level of employees, excluding trainees being at 82% for the 9 months ended 31st December 2023. This concludes the update on the quarter, and we can now open the floor for the Q&A session.
[Operator Instructions] We take the first question from the line of Vikas Srivastav from RBC Financial.
A few related questions. First question was why was this quarter tough? Was it seasonal? Was it an aberration? Are we seeing something different from what we were seeing earlier? That was -- that's my first question. And how is -- how are things looking for the next few quarters? And of course, your 2030 goal I hear remains intact. But short-to-medium term, how are things looking?
Quarter was tough for 2 reasons. One, there is -- there are headwinds in the U.S. market, our biggest market. You can't fight these headwinds, and you have to survive. So it will start from that perspective. Now, the other thing that we've been talking about in the last few calls is that to grow organically, we have to strengthen our sales front end. And for that, I have been saying repeatedly that every quarter, we will try and add a senior sales guide to our team and whether it's a bad -- I mean, whether it's a struggling quarter, average quarter, a good quarter, we have to keep doing that. Otherwise, the $500 million target of 2030 is not going to be achievable. So we did that, and that's expensive. There's a recruitment cost and there's a cost of the new hire, et cetera. So that hit our EBITDA margins. And this was compounded by the fact that revenue in that quarter did not grow as much as we would have expected it to because of the headwind. So it was a double [indiscernible]. Now how does quarter 4 look? How does the next year look? I would say it's definitely going to be better than quarter 3. Headwinds are still there. We are trying very hard to make sure that we mitigate as much risk as we can. But these are the challenges of a small cap. That's the risk/reward scenario. There will be ups and downs for sure.
I don't think this quarter is a sign of bad times ahead. That is definitely not visible. It's probably a little bit of a reality check for us. We've had some really good quarters. I think it's a wake-up call for us to work harder and move the company forward or not stronger [indiscernible]
Got that. I was more interested. So you know Aditya, when we spoke the last few quarters, the headwinds were always there. There can be in a smaller company, there can be short-term aberrations. What I was looking for is that overall, we knew there were headwinds in the U.S. Overall, there can be setbacks, a quarter here or quarter there. But your confidence, your medium- to long-term view on growth, profitability, et cetera in your view, remains intact. That's one follow-up question. And in terms of how -- in terms of the new sales which you are adding and with additional cost, which is, in my view, an investment, are we going to see some more results in terms of higher number of high-ticket clients?
I heard that you've probably 15 clients of about $1 million. Do you expect that to happen? Do you expect the sales engines tool that you're investing in to start kicking in? And in terms of doing $500 million by 2030, in a rough back of the envelope calculation, you're looking at 20% to 25% year-on-year growth, right? Are we -- do you think in the short -- when I say short, I'm not talking about quarterly, but on an annualized to medium basis, we are still aiming target, and we haven't lost sight of that target.
Absolutely, Vikas. There is no silver bullet. I mean there is no silver bullet, so we can't really say, okay, since he joined this quarter, he's going to hit a home run and we're going to get a $1 million client next quarter. It doesn't work like that. It is a long-haul objective. We have to invest. We have to stay the course. We have to be patient. We have to put the right performance metrics for the sales team in place to perform and grow the business. And that is what my job is and my team's job is and we are focusing on that. So in terms of future, nothing has changed. It's just a little bit of a rocky quarter and the target of $500 million by 2030 is definitely on the cards. It means aggressive growth, but then growth -- we know as much as anybody else Vikas that expense or cost always comes before revenue. So that is the challenge of a listed entity. We have to balance this investment vis-a-vis the quarterly results. That's sort of a very careful balance that we have to always play. So to answer your question, there is -- this quarter, first of all, it's a flat quarter. Profits are down because of the investment in sales, what will quarter 4 look like, definitely, it will be better. What will next year look like, clearly in line with $500 million by 2030. As of now, nothing changes. But we will see one or 2 quarters here and there. And shareholders have to be patient. They have to believe because what goes around comes down Vikas, you know that.
So Aditya, I'm very comfortable with that. I just wanted to add to what you said. Why you are listed while we are short-term. There may be pressures from shareholders of the markets because of quarterly results. But I like -- in terms of investment while the Indian accounting standards don't allow, but as I said, if you're putting money into sales, that's an investment really. It's a deferred revenue expenditure and Indian accounting and U.S. accounting, you have to write it off, which is perfectly alright. It's [indiscernible] machinery as far as I'm concerned in terms of generating sales. So short term, as a investor doesn't bother me at all as long as what you are saying and what I'm hearing is, in my view, very comforting. I can only speak for myself.
[Operator Instructions] The next question is from the line of [indiscernible], an individual Investor.
Just had a couple of questions when it comes to your acquisitions in the past. Firstly, I would like to understand the operational performance of those. So are your acquisitions profitable now?
Yes, all the companies that we acquired were profitable when we acquired them and they remain profitable.
And what kind of organic growth percentage would be -- would we be expecting going ahead?
We have to grow 25% year-on-year. Now 25% on INR 800 crores is INR 200 crores. We can't afford an inorganic growth of INR 200 crores because we don't have that sort of money. So at best, you're looking at INR 50 crores of inorganic and 150 -- and I'm giving you ballpark INR 150 crores of organic. So give or take, 10%. So INR 50 crores, INR 150 crores is what we're looking at from an inorganic and organic perspective. So that [indiscernible] with the earlier question and my response about investment in the sales engine. Now to grow organically, you have to have a larger sales team. Larger sales team means you have to put money before the revenue comes in. And the cost of recruitment is high [indiscernible] 30%, 33% of the first year compensation. All that hits the quarterly numbers. So maybe I'm preempting a question from you, but please keep that in mind as we look at quarterly numbers.
And what would be the expected say, increase in the -- what do have the experience in the increase in employee costs in the past year? since you said that we'll be looking at hiring to expand the sales team as well as that's how that would benefit our expansion into the overall business.
So the technical average cost is different from the sales average cost. I don't have the numbers offhand, but I can send them to you. So from a technical average cost -- average employee cost, I would say, last year, we would have increased by maybe 10% to 15%. But the sales cost would have gone up by, I would say, on average, average sales cost would have gone up by 30% per employee. But I'll give you the numbers.
And do we think that this will be sustainable in the future?
Say it again.
Do we expect that increase in cost to be sustained by our numbers in the future, at least for the coming few quarters?
This is going to happen because, like I said, we have to keep adding to the sales front end. So averages will not go up that much, but there will be an increase in sales costs every quarter for the next at least 6 to 8 quarters as we add more people. Now as far as technical average cost of sales at average cost is concerned, I think next year should not be such a big increase in average cost because attrition levels have come down considerably. So hopefully, next year expectations from the market will be less.
We take the next question from the line of Parth, an individual investor.
So my question was more on the macroeconomic side of things. So we'll be seeing some interest that is also coming in the next year. So how do we see that panning out in our revenues and margin reference?
Could you repeat that question? when you said macroeconomic, what indicator you're referring to?
I'm talking about the interest rate cuts that you are anticipating in the next year. So how do you see that affecting us as a company?
Well 2 things on that. One is we have very limited debt on our books. So I mean, from an interest expense perspective, I don't think it's going to have a significant impact on us. But from an economy perspective, if the prime comes down in the U.S., which is the largest market, definitely, growth will accelerate off some of our customers as well as prospects, which will mean more discretionary spending on the IT side, which will help us. So if that happens, if prime comes down, interest rates come down over a period of time, it should help us from a demand perspective.
We take the next question from the line of Vikas Srivastava from RBC Financial.
Aditya, if I heard right, you obviously have had some big ticket acquisition on sales. Are we going to be hiring at that level through the next 3, 4 quarters? Or is it going to be intermittent, maybe for example, in the next 5 quarters, 2 more senior sales guys. That was one question. And the second question was, how is your M&A pipeline looking as you mentioned, that we are both organic and inorganic and I know you can't disclose any specific, but what are we looking in terms of M&A in terms of what -- typically, what size of companies are you looking at? And I won't even ask you what areas, but how much can we absorb and what kind of time spend are we talking about before our next M&A? Just -- I know you can't say anything for sure until it's done. But what -- how is it looking in terms of -- if you have things in your way, what -- how would it go in the coming, say, 5 quarters.
I mean, if I was -- if I had a crystal ball with us next 5 quarters, I would really like to do 2 inorganics of INR 50 crores top line each and add one sales person every quarter. So 5 new sales guys, 2 acquisitions of INR 50 crores each totaling to INR 100 crores over the next 5 quarters. Now in which area, we are going to take up debt on product engineering, digital engineering. We have seen a lot of success of companies like Persistent, Global Logic, [indiscernible], so we are -- and we have a lot of capability in-house on that. But I think to get to $500 million, we need to put a stake in the ground. And I think the stake in the ground for us is going to be product engineering. So these companies that we're going to look to acquire are going to be in that space, which are going to help us from a capability as well as customer base. Now given that there are INR 50 crore companies, we're not going to get any -- you're not going to get any sales engine. We're only going to get capability and maybe a few strong marquee customers. So that's the hope. But hope is not a strategy. So very clearly, the focus is in which we can control is adding salespeople to the team, good competing guys who will stay with the company and not churn, number one. Number two, keep the M&A pipeline and do at least every year to at least one or two 50-core deals.
The next question is from the line of Amit Jain from Monarch Networth Capital.
So Aditya, just a follow-up question on what you just replied to Vikas. About the strategic point of view, the area that we are targeting for future growth. And my second question is about the verticals where you're seeing more speed. So we can just [indiscernible]
Amit, like I mentioned to Vikas, we're going to take a bet on [indiscernible]. So from a strategic capability, building and focus perspective, that's going to be -- that's going to be our pitch and that's going to be uptake. Now which business vertical or industry vertical and that it will be what we are currently could at, which is Fintech, Hitech and Transportation logistics. So I don't think it makes sense to spread ourselves to thin. I think it's important to be very, very competent in a narrow area because it's -- for a company of our size to be profitable and to keep growing and to have sustainable momentum, we need to operate in market niches. So what's our niche? our niche has to be industry verticals and within that industry vertical, it has to be product engineering as an example. So we will stick to that. So it's sticking to our inch-wide mile deep strategy.
Aditya, in terms of you mentioned about product engineering. Is it possible if we can do some breakup that currently how much we are deriving our revenue from that part? Or is it still a work in progress?
Currently, from product engineering, we would be -- how much is application engines -- so almost 50% of our revenues today are coming from application engineering. Now a subset of that is product engineering. I would say, at least 80%. So 80 -- about, I would say 40% of our revenues are coming already from product engineering. So we need to build on that.
When you say, Aditya, just from the [indiscernible] point of view because [indiscernible] bifurcate the IT industry. So we are, on one hand, the large entities like these are majorly driving their revenues from application services and when I see a company like Persistent, maybe they have some products or other companies [indiscernible] -- please correct me if I'm wrong. So that is where we are trying to get more stickiness from our customers to have more products so that stickiness remains.
Amit, the question, your -- it's not clear what you're saying. Can you repeat it slowly, please?
Aditya, I'm just asking from the perspective of the positioning ourselves. So what I'm asking is about [indiscernible] a product company, product engineering. So my understanding is that if you have a product, then there is more stickiness. So client is more -- remains with you.
No, no. When I say product engineering, it's not a product -- we are not a product company. We are a product engineering company. So we will build products for our customers. Like the Global Logic, like the Persistent, like the [indiscernible].
Understood. And Aditya, one thing in terms of your employee head count, I see that utilization is going on a 9-month basis. So it's more to do with the demand slowdown or something we are adding more employees to just -- just a quick take on this.
Quarter 3 has a number of holidays as well as some of our customers utilize something called furloughs, where they will not utilize the teams for sometimes 10 days, sometimes 15 days. So that has hit the utilization. You will see that back on track in quarter 4.
The next question is from the line of Jyoti Singh from Arihant Capital.
Sir, my question is on the acquisition side that we are looking to do like a INR 50 crore each for the 2 acquisition. So what are criteria? What kind of criteria we are looking for that -- those companies?
Number one, profitable companies, EBITDA of 20% plus. Second, focused predominantly on the U.S. geography. Third, strong capability in product engineering. And lastly, founders who align with the way we think and will stay with the business for at least the next 3 years.
Sir, this 2 acquisitions. I mean, what like -- if you can comment on the order book side that we have currently for this particular segment, like we are looking for the product engineering side.
Current order book for product engineering would be in the region of, let me tell you, INR [ 400 ] crores.
Ms. Jyoti, does that answer your question?
Yes.
[Operator Instructions] We take the next question from the line of [indiscernible] Shah, an individual investor.
My first question is from the side of sectors which [indiscernible]. Currently, I can see that Fintech is a major revenue contributor. So how is the profitability from Fintech sector? And going forward, which of the sectors, we may have increase in our revenue and how would be the profitability from that sector?
Niraj, can you take that.
Sure. Fintech sector is actually the most profitable for us. It's also our largest vertical. And from a profitability perspective compared to the other verticals is profitable. The second largest vertical, which we are having is on the Transportation and Logistics, which is equally picking up, and we have very good referenceability in the sector in the U.S. market. We are also aggressively moving in this vertical in the U.K. market too, and the margins are catching up in this vertical too. So I think Fintech and Transportation and Logistics, these are the 2 verticals which are contributing significantly and the margins between them, the Fintech is the better contributor.
Can you quantify the margin?
I will not have that [indiscernible] split up, but we will be able to share that subsequently.
Okay, sure. Another question was on the geographical presence wise. So I just wanted to have an idea how much was the revenue from India? And going forward, how -- what are our prospects on to the India revenue front? Like going forward, how -- do we planning to have further revenue presence in India or reducing our strategy for that?
It was there in our investor presentation. The U.S. is 43%, Europe is 23%, the Asia Pacific is 34%. The reason why Asia Pacific is going up is because some of our U.S. customers are building global capability centers in India. And we are following the customer and providing services in their GCC in India. So over the coming years, you will see an increase in Asia Pacific because of that. In effect, it's the same U.S. customer, but being serviced out of India.
And how is that to profitability wise of the U.S., Europe and APAC region, which is the highest profitability region for?
The highest is the U.S. followed by Asia Pacific and then Europe.
I had an operational highlights that were mentioned -- it maybe addressed, I have joined late. But it's mentioned that the EBITDA margins have majorly declined due to we have made investments into sales engine of USD 500 million to you have a target revenue of USD 500 million by 2025. So I just wanted to have an idea that when can we see our EBITDA margins coming on to the previous levels or even have on a better position going forward?
EBITDA margins took a hit in quarter 3 because of the investment in sales and also because of the furloughs and the reduced billing days, which typically quarter 3 has. Quarter 4 should see better EBITDA margins.
So can we expect from the range of something 18% to 20% or so?
I wish, I don't think we ever got to 18%, 20%, but yes 18% would be aspiration, yes.
We'll take the next question from the line of Abhishek Sharma, an Individual Investor.
Question is what new business strategies have been made over the last few years to accelerate the growth?
What new -- can you repeat the question? What are the new?
So what are the new business strategies that have been made over the last few years to accelerate the growth? And on what ground [indiscernible] projecting $100 million revenue growth by the end of this fiscal year. I would like to know what are the growth strategies being followed?
Over the last 2 years, Abhishek, no [indiscernible] has been made in strategy because to implement strategy, you can't keep making -- you can't keep making changes. You have to put a stake in the ground and implement it and follow it through. So our strategy has always been over the last 3 to 4 years, when we embarked on this growth objective of $100 million by this year, it has always been to work in market niches and protect our business in these market niches. And what are those niches? the niches are the industry verticals of Fintech, Transportation and Logistics, Hitech and Health Tech. So we are continuing to do that. And in those industry verticals, we provide horizontal service offerings of data and analytics, testing, digital engineering and infrastructure. So no real change in this approach over the last 3 years and the growth that we have seen over the last 3 years is a result of this strategy.
Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management from Saksoft Limited for closing comments.
We thank everyone for taking out time to participate in this call and for your interest in Saksoft. I hope we've been able to answer your queries. In case of any other queries, please reach out to us or to our Investor Relations advisers, Valorem Advisors. Thank you, everyone, for joining us.
Thank you. On behalf of Saksoft Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.