Mphasis Limited Q1FY14 Earnings Conference Call

Transcription

1 Mphasis Limited Q1FY14 Earnings Conference Call MANAGEMENT: MR. GANESH AYYAR CHIEF EXECUTIVE OFFICER MR. GANESH MURTHY CHIEF FINANCIAL OFFICER Page 1 of 17

2 Ladies and gentlemen, good day and welcome to the Mphasis Limited Q1FY14 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing * then 0 on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Varun Divadkar of CDR India. Thank you. And over to you sir. Varun Divadkar: Good morning, everyone and thank you for joining us on the Q1FY14 Results Conference Call of Mphasis Limited. We have with us today, Mr. Ganesh Ayyar the CEO and Mr. Ganesh Murthy the CFO. Before we begin I would like to state that some of the statements in today s discussion maybe forward-looking in nature and may involve certain risks and uncertainties. The detail statement in this regard is available on the Q1 FY14 Results Announcement Release that has been sent to you earlier. This conference call will be archived and the transcript would be made available on Mphasis Corporate Website, I now invite Mr. Ganesh Ayyar to begin the proceedings of the call. Thank you, Varun. Good morning, everyone. Thanks for joining us on this call today. We will be discussing the operating and financial performance of the first quarter ended 31 st January Let me list down the highlights for this quarter. Despite the seasonality, Direct Channel revenue grew 1% quarter-on-quarter or 2.2% sequentially if you remove the impact of the rupee appreciation. This growth is significant when compared with Q1 FY13 growth of 1% net of rupee depreciation. We would like to highlight the quality of revenue growth during the quarter where we had key contract wins in our focus areas driven by products and platforms. We won a contract in Infrastructure Services involving our MOATIS tool, an international BPO deal and two contracts for Wynsure license. Our named account strategy, niche portfolio and highly talented work force are the reason behind this result. Our revenue productivity per employee during the quarter grew by 2%. The Direct versus HP business mix has improved significantly to 63% Direct and 37% HP in first quarter 2014 against 60:40 last quarter, and it was 48:52 in first quarter of To improve our go-to-market and provide further impetus to organic growth, we have strengthened our sales leadership. During the quarter we increased our sales team by 16 people and over the last one year we have added 51 sales professionals including senior leaders in our focus area of Mobility, Testing, Infrastructure Services, etc. Digital Risk continues to perform well and have exceeded the targets we had set at the time of acquisition. We expect the US mortgage industry to be volatile, and as a proactive measure we have realigned our work force. As part of this we have converted 786 employees from permanent staff to temporary staff. This flexible delivery model will help us to be nimble in our client delivery and the variable cost model will protect our margins. Page 2 of 17

3 On the operational front, we have successfully tackled the headwinds of impact of client shutdown (50 basis points impact), and higher provision for IS India Government receivables (20 basis points impact) and have maintained our EBIT margin. As part of our efforts to reduce the exposure to India government business, we have entered into an agreement to sell a portion of the business. This is a significant step towards eliminating any further impact to profitability as we enter the next financial year. Cash generation continued this quarter with cash and cash equivalents increasing by Rs.1,589 million to reach Rs.26,470 million. This war chest of US$422 million puts us in a good position to pursue inorganic growth in our strategic focus areas. Also, we aim to continue with our philosophy of sharing wealth with shareholders. We have recently unveiled a refresh brand identity marking an important milestone in the context of company s corporate evolution and commitment to our stakeholders. It is important to alter external perception of the Mphasis brand given the transformation internally and to reposition Mphasis as an innovation-led, high value-driven specialized and customer-focused organization. It supports our strategic objective of growing our Direct business faster than the industry. To conclude, we remain focused on growing certain key accounts that we have identified. We would continue our investments in portfolio specialization to improve margins and deliver greater business value to our clients. So on that note, I thank you for your continued interest and let me ask the moderator to open the line for questions. Over to you. Thank you very much sir. Ladies and gentlemen, we will now begin the question-and-answer session. The first question is from Abdul Karim of Narnolia Securities. Please go ahead. Abdul Karim: As on 31st January 2014, cash and cash equivalents stands at Rs.2,647 crore and increased by Rs.159 crore during the quarter. How will you utilize your cash in the near future? And at the same point of time, the company is focused on high value and specialized activities. Do you see any merger and acquisition activity in the near future? Which verticals and geographies will be the key priority and what will be the size? Our focus on cash utilization is two-fold, one is we have a strategic roadmap for the company and on a selective basis we will do inorganic acquisition to accelerate the pace for achieving that strategic roadmap. Second, we continue to stay committed to sharing our wealth with our shareholders through dividends. Now let me come to the specific question which you had on acquisition. Obviously, acquisitions are something which you cannot say has happened until it has happened. To predict that it is going to be imminent and it is going to happen is a very tough thing. The areas that we are focused on are in the Emerging Services area which includes Visual Analytics, includes anything as a service model, which includes solutions around wearable computing and digital space. These are the areas which we are focused on, Page 3 of 17

4 and especially, these solutions which can serve the clients in the space of Banking, Capital Markets and Insurance are of higher importance. That is where we will be focused on. I am not in a position to share whether it is imminent, it is going to happen next week or it would not happen next week, because as and when it happens we will be delighted to share those details with all of you. Abdul Karim: Your peers are more focused on cost rationalization to maintain margin stability. I wanted to know, do you consider the same mode of strategy regarding cost rationalization, and how do you see the margin trend in the near future? I will talk a little bit about our strategy and then I will get Ganesh Murthy who is our CFO to comment a little bit about the margin picture. I do not believe that there is ever a time when you can say that I am not focused on cost because as a business you need to remain vigilant on cost. But to say that cost is a main plank of your future roadmap, as far as we are concerned, that is incorrect. Our focus is to bring a newer type of services, newer business models, be in the path of relevance of our customers, because I fundamentally believe that the IT Services business in its current form will cease to exist in the years to come. Hence that is extremely important. The investment that we have made in our own transformation - we have done two waves so far; first wave was done 3.5 years ago, second wave was done 18 months ago, that is enabling us to reach our destination and we will continue to stay focused. As far as the predictions on costs and margins, let me get Ganesh Murthy to talk about it. If you look at our gross margins over the last three years, as Mr. Ayyar mentioned, during this period in FY12 we had a gross margin of about 23.6%, in the next one year it improved to 25.2% and after that during this quarter we have improved it to 26.5%. So you can see gradual improvements in the gross margin. Talking about EBIT margins, we have always maintained that our aim is to have our EBIT margins between 15-18% and we are on track. This quarter we have been impacted because of the seasonality and the annual shutdown in some of our large customers, but despite that we have still managed to maintain our EBIT margins at 15%. So going forward we will continue in this path. Thank you. The next question is from Sandeep Shah of CIMB. Please go ahead. Sandeep Shah: Firstly, wanted to understand in the Direct business, is it the strategy to grow in the traditional outsourcing or is it the strategy to grow only through the emerging technologies and the new technologies coming into play? Because as Mr. Ganesh Ayyar has said that the current IT system or the model in which the growth has been coming for the industry may cease to exist? Let us start with how the customers are buying before we say how we want to grow, because if you are not in alignment with customers buying pattern and consumption pattern, we as a business will fail. So, if you look at what the customers are doing, if you divide it into two buckets, first is Emerging Services, the other one is Traditional Services. In Traditional Services, the customers are rethinking the business model. So any company which is in that business needs to be nimble enough to have different kind of business model in Traditional Page 4 of 17

5 Services. Secondly, customers are facing reality in a marketplace where the whole digital transformation which is taking place especially if you happen to be in a B2C environment, is causing you to think of how do you go to market. So digital transformation is a huge area where they are investing, and it is very specific to the industry, the type of things that you will invest in as a bank or a retail bank versus if you are an insurance company it is different or if you are a manufacturing it is different. So our focus on industry specialization and the IP (when I say IP, it need not be our IP, and it could be partners IP), combining it together to get into the space of Digital, Analytics, Wearable Computing will ensure that we are in the path of relevance of our customers. So to say that it is completely going in the direction of Emerging Services and we will start ignoring the Traditional Services that is not true. In Traditional Services our focus would be to bring differentiated value through innovative business model by introducing automation and in Emerging Services our focus would be to bring industryspecific solution sets especially in the customer insight management, customer interaction management, multi-channel in the face of governance risk and compliance based on Analytics and new devices which are emerging. That is going to be our focus but, we will make it relevant to a bank like a bank, to an insurance company like an insurance company and that is how we are approaching this market. Sandeep Shah: Is it possible in the current Direct business what is the split in terms of a Traditional outsourcing and what is the split in terms of Emerging Services in the current portfolio? At this point of time that is not readily available, but in time to come you can expect that we will start sharing the data, because it is important we need to share the data the way we manage our business. Increasingly that is the focus, so, you can expect this data will be shared in quarters to come. Sandeep Shah: But, is it fair to say because these things have been evolving for the industry as a whole, for you also the traditional business would be the bulk of the Direct Channel business currently? It has to be, right, because nobody will flick a switch and say that traditional business dies today and Emerging Services takes over everything. So it would be a gradual process and that gradual process will accelerate in time to come, and we are participating in both these areas. So you will see shift happening but it would be a gradual shift. Sandeep Shah: In this journey where we try to change the model of traditional outsourcing, do you believe it could be a V-shape recovery where initially there could be some amount of hiccups because of the change in the delivery model and then the growth path may come. If you look at the total size of Traditional Services business, I do not believe that the size of the pie will grow. Secondly, some of that pie will start getting lost in not just newer business models but in completely newer models and which you classify it as Emerging Services. So in that sense to say that certainly there will be a bulge in Traditional Services, I do not subscribe to that point of view. Page 5 of 17

6 Sandeep Shah: No, I was asking for you as a whole? For Mphasis as a whole, we are participating in this market, so I do not think we operate in a standalone basis, we are actually dealing with the customers on whom many IT Services players are calling. Our job is to make sure that we are more relevant and more agile and more intense about the services that we deliver. So I think what is true for market is true for us as well. Sandeep Shah: The portfolio for us now in the Direct mature channel is as big as $500 million, including the Digital services for FY2013. And what we hear from the participants are in the digital technologies, currently, the size of the deals are not very big. So in that scenario, is it fair to say that with our selection of adopting more on emerging side of the business as a growth driver, the growth rates in the initial part may not be as in line with the industry or may be lagging versus industry? Definitely we will not lag the industry. What you are referring to, Sandeep, is more Mobility. People are talking about Mobility deals that tend to be smaller, but that is not true in the digital transformation space. If you are doing customer insight management, and you do it across multiple channels these are not small deals. As far as Mphasis is concerned, we continue to stay confident and on course to deliver 1.5 times the market growth rate on mid-term basis. No, it is not compromising the growth. Sandeep Shah: In that $500 million, if I look at the Digital Risk consolidation was closer to around 8-9 months and for the coming year it would be for the additional 3-4 months. So that itself may add $50 million worth of revenues, which is a 10% growth. Over and above that, you have a couple of large deal wins in the Digital Risk, and plus there is a growth which may come outside the Digital win. So in that scenario, I think the growth should be much higher in this year because of the full year consolidation of the Digital Risk. Because in the earlier conversation, you were saying that you would be closer to the industry growth rates of 13-15%, which is being given by the NASSCOM. Just looking to reconcile this, why the growth rate should be lower in the mature Direct Channel while it should be higher because of the full year consolidation of Digital Risk and our deal wins? Sandeep, we have been consistently maintaining that we will grow in our Direct Mature Channel ahead of the industry, and we are talking about organic volume growth. So you will have to compare on a like-to-like basis,. On a year-on-year basis if you just take the total growth, it will be significantly more. Sandeep Shah: So one should say that you are giving on a pro forma basis growth or on a reported basis.? I do not know much about pro-forma basis, but I would say organically in volume terms we aim to grow above the industry. Thank you. The next question is from Madhu Babu of HDFC Securities. Please go ahead. Page 6 of 17

7 Madhu Babu: Can you start disclosing a metric like top 10 accounts in the Direct Channel and the volume growth in them every quarter? What is the number for this quarter? We do not give that kind of specific client information. Madhu Babu: Last time, we said 8 of the 12 accounts in Direct Channel have delivered growth in last quarter. So, any such comments? We have our key 12 accounts. The growth has not been very spectacular because many of our large clients, US clients specifically, have also witnessed their annual shutdown. So this is a seasonal factor for us. Madhu Babu: What is the total sales headcount as of now? Total sales headcount is mentioned in MD&A, it is about 379 people as of January. Madhu Babu: And last thing, in case of a rupee appreciation scenario, do we have the comfort that whether it is possible to give a muted wage hike or delay wage hikes to protect our margins? First of all, our hedging policy is very balanced. So that should mitigate either sudden appreciation or depreciation. Your question on wage hike. Two filters which we use are what is going to be the market practice and our affordability. Based on these two filters, we will be administering our wage hike. Thank you. The next question is from Pratish Krishnan from Antique Stock Broking. Please go ahead. Pratish Krishnan: My question is on the overall deal pipeline. Last quarter, you spoke about at least three or four large deals, which you are pursuing and if possible closure on these accounts. Can you just provide an update on this one, and anything that we should expect over the next one quarter or something? The deal pipeline continues to be strong. Out of the four large deals that we have, one of the deals have been withdrawn by the customer. The three deals continue to stay in the pipeline, and out of those three deals we can expect at least two deals to be decided over the next three months. Pratish Krishnan: Any update in terms of how Digital business faired in this quarter in terms of specific numbers or probably just the growth direction? They have been consistently exceeding both revenue as well as EBIT targets, and the specific targets that we have set for each quarter. Page 7 of 17

8 Pratish Krishnan: Just lastly, on the rate side, in this quarter, the onsite rate has probably gone up on the Application side, any particular one-off reason? Nothing significant. Thank you. The next question is from Rahul Jain of Dolat Capital. Please go ahead. My question is related to emerging market revenue. Can we say that we have come to the steady state run-rate on the emerging market because there is no receivable adjustment in the top line in this quarter? Yes, you are right, that is a reasonable assumption. For the last one year we have had a significant headwind in the emerging market space because of our India government contracts. Now that we have sold a major portion of the business, those headwinds will not impact us and we would not have that overhang in future. Rs.6 crores the entry which we have passed through P&L, is there anything that is still left and what is the balance sheet entry on the same thing? We have entered into an agreement to sell the business. The transaction has not closed, because there are certain closing conditions that have to be fulfilled by both the buyer as well as by the seller. Once the transaction closes then we will pass the balance sheet entry. There will not be any incremental loss and there would not be any incremental P&L impact but from the balance sheet perspective we will remove all the assets and liabilities relating to the business once the transaction is closed. So basically you have readjusted the asset size by Rs. 6 crore and that you have passed on to the P&L, and there is no further markdown which is expected there? That is correct. What is the status of the receivables that we have written off on the India business? This is a net entry that we have passed. No, I was trying to understand about the two components which we have adjusted in the revenue line in Q3 and Q4. That is what I am saying, it is a net entry that we have passed which is Rs. 6.4 crore. I will probably take that offline. If you could share the non-es HP revenue in the quarter? The non-es HP has also been impacted because of the shutdown which is an annual feature. So the cut is similar as compared to what the cut for the total HP? Page 8 of 17

9 In dollar terms it would be around $ million. This headcount is pretty down across segments on the offshore side, if you could throw some light on that? We do not look at headcount growth as a metric. In fact, if we look at our productivity, our revenue per employee, we have actually increased the revenue per employee from Rs.149,000 in Q4-13 to Rs.152,000 per month in Q1-14 and this is in line with our strategy of acquiring non-linear growth. So I think this is a useful interesting strategy for us. We will increase our headcount base purely on demand situation and as we are focused more on non-linear kind of growth, the productivity will kick in. Specifically, I was looking at the BPO onsite number because this would be broadly the Digital Risk kind of a number, so 450 people are on that particular segment where we were expecting a people ramp-up. So if you could share there something? It is more or less in line, so last quarter we had onsite BPO was 1,909 people and end of this quarter it is 1,852 people. So it is more like a natural attrition rather than any? Correct. If you could share more on the 16 sales people, is there any specific area which we have added these people? We are building something called Specialized Market Unit which we started doing 18 months ago. This unit is focused on solution set around XaaS, Mobility, Testing, CRM, ERP and the people whom we have brought in majority of those people are specialized sales people and not generalists. We have also inducted some good senior leaders in the sales organization, not to forget some of the delivery leaders that we have brought in. So a combination of leadership roles within sales and delivery and specialized market unit focused sales professionals. So as we have highlighted earlier that we have added senior leader in their respective seven focus areas, is there any gap which is still prevalent or are we more or less covered up the kind of people we want to hire in the segment? We would still be looking for some specialized people in time to come. As far as leadership is concerned, I think we are fairly good. Of the $22 million TCV which you have shared, is there anything which has come up from Digital Risk portfolio as well? Page 9 of 17

10 In Digital Risk there has not been any large deal closure in this quarter, but most of this are BPO deals, and what we are thrilled about is actually most of the $22 million deal wins are in our chosen areas using our platforms and products. Thank you. The next question is from Sachin Shah of Emkay Investment Managers. Please go ahead. Sachin Shah: Just wanted to understand your general and administrative expenses, do we see some stability there or do you still see that still moving up like it has gone up in the last one year? The reason why it has gone up from the last one year that is primarily because of the Digital Risk acquisition. Last year we did not have Digital Risk, now in this quarter Digital Risk results are included. So that is the reason for the steep increase if you compare it on a year-onyear basis. But apart from that we would like to maintain it at an absolute level more or less the same going forward. Thank you. The next question is from Sudhanshu Bhuwalka of Macquarie Capital. Please go ahead. Sudhanshu Bhuwalka: Mr. Ayyar, you had mentioned that you expect the IT Services business to be very different a few years out. Would it be possible for you to sort of elaborate how do you think the business will change, or the nature of the business how will that change? I will give you one example, to elaborate probably will take a long time., The whole world was about either outsourcing, offshoring your application management service and then you used to buy a package, you used to do implementation and so on. So that was the whole world and the entire industry did exceedingly well with their expertise through a combination of outsourcing and offshoring to bring the value proposition to the customer. If you take the same transaction which they were performing through the traditional model and replace it with business transaction as a service which is a combination of application software, infrastructure and running of that entire environment and maybe even have BPO on top. The moment that happens the whole value proposition which has been built in terms of offshore and outsourcing in traditional model will come under significant threat and then you will have to think of how do you build your ability to provide business transaction as a service, what kind of partnerships you have, how you can blend BPO and IT Services together to have the overlay of business model. So this is just one example of how IT Services were being consumed and sold earlier versus how they may get consumed and sold in time to come. Thank you. The next question is from Nitin Mohta of Macquarie. Please go ahead. Nitin Mohta: Just in terms of clarification on the Direct side, I understand a lot of time has already been devoted on it, but if I can understand this again. When you say you would be able to do grow on that particular segment, would it be fair to assume, last year, excluding Digital Risk, that particular channel had a flat year? So, this time, excluding Digital Risk, what are the drivers Page 10 of 17

11 which can help us do better than what the NASSCOM growth rate? I understand Digital Risk is a big portion for growth, but if I were to take Digital Risk out of the picture, just on the core Mphasis business, what are the drivers for Direct channel to start growing? First, let me clarify, if you look at the volume growth of our Direct business last year excluding Digital Risk, in the mature market, that is excluding the emerging, it was in the vicinity of 12%. To say it was flat, it is probably not accurate. Now, going forward why we feel confident about growing at a faster rate than the market growth rate is because we have invested significantly in specialized sales force, we have been invested in named account strategy and more importantly, we have created a portfolio which is a good blend of Traditional Services and new services and that makes us confident that we will outpace the market and our pipeline is also robust by the way Nitin Mohta: Any specific verticals or any particular service line that you feel is getting that traction which makes you bullish about next year s prospect? It is interesting you ask of service line, because in time to come, I do not know how I would classify a service line if it is business transaction as a service, Should I call it BPO, Infrastructure or Apps. So I would not comment on service line because that is our internal definition of how we look at the work. But I clearly see tremendous opportunity, as I said in Traditional Services with different business model on one hand and the second area where I am seeing significant opportunity is in the space of digital especially customer insight management, in GRC and multi-channel integration. Nitin Mohta: On the digital opportunity side, obviously, you as well as a lot of your peers have talked about the opportunity there, but anything other than a proof-of-concept project that you have taken for your clients or is it still the discussion primarily around a proof-of-concept project and then probably clients would take a hard look in terms of doing larger size deals? I think in a couple of areas we have moved beyond proof-of-concept and if I look at the proofof-concept projects right now still there are more proof-of-concept projects beyond that, but there are a couple of projects which we have won as a result of successful proof-of-concept. Thank you. The next question is from the line of Kunal Tayal of Bank of America. Please go ahead. Kunal Tayal: I had a couple of questions on Digital Risk. Firstly, Mr. Ayyar, I think in your opening remarks, you indicated that close to 800 employees could be shifted to a contract-based model. I think at the time of acquisition, your total Digital Risk employees were 1,500. So is it correct to interpret that volatility in that business could be as high as 40-50%? Volatility is of two types, if I may, one type of volatility is in terms of demand and the second type of volatility is the type of demand. If the demand drops if you have flexi-workforce you can flex down, that is the advantage. Now, the second advantage which you have is the talent Page 11 of 17

12 that you need, if you have a fixed work force you cannot shift that far. So it is those two factors which have led us to this and the new model which we are putting in place is more nimble and is able to take advantage of that faster. Kunal Tayal: Curious to know what is the kind of outlook you are expecting for Digital Risk over the next year or so, if you could just give us a comparison with versus what it has grown over the past year? As a response to another question we are not providing any business wise specific information, but all we can say is that we are confident that they will continue to exceed their targets. Kunal Tayal: Only thing I am trying to clarify here is that there is no sharp drop in revenues expected from Digital Risk for now? No significant decline in revenue. Thank you. The next question is from Mahesh Bendre of Quantum Securities. Please go ahead. Manish Bendre: Sir, our non-hp business has actually grown 23% CAGR over the last three years, a combination of both organic and inorganic growth, and this growth was largely on the backdrop of a challenging business environment. So when the US and Europe are fairly doing well, do you think we will be able to maintain this kind of growth in non-hp business over the next three years? You are talking about non-hp as in the Direct Channel? Manish Bendre: Yeah, Direct Channel. As I said, our focus is to definitely grow faster than the market and as of now we clearly believe that we have good grounds to feel that on a mid-term basis we will grow faster than the market. That has been our stand and that continues to be our stand. Manish Bendre: And sir, from the services line viewpoint, Application Development and Maintenance together contributed roughly 49% to our sales for the current quarter. So, is it reasonable to assume that 50% of the business will be HP in ADM? We did not understand your question, because Application Development and Maintenance includes both HP as well as Direct. Manish Bendre: I just want to know where HP business flows into service lines? It flows into all the 2-3 service lines. There is HP business in Application Maintenance, Application Development, Service, Technical help desk, Transaction Processing, Infrastructure Management. Page 12 of 17

13 Manish Bendre: Earlier, we had said that in Infrastructure Services, 70% business is basically HP. So I am just wondering what would be the contribution roughly in the Application Development and Maintenance? About 50%. Manish Bendre: What part of our business is annuity business? If you look at Application Maintenance which is 29% this quarter, obviously, it is annuity business, similarly Customer Service, Helpdesk, Transaction Processing, all these are annuity businesses including Knowledge Processes. Application Development which is 20% of our revenues which is more of a project-based and license income which is again one-off. Manish Bendre: In the opening remarks, you mentioned that the company would like to maintain our operating margins anywhere between 15-18%. We have been talking about expanding our Direct Channel business going forward. Last year, we added Digital Risk in that, and we are probably looking at further acquisitions in the upcoming period. So do you think there is some structural probability, some challenge to maintain the margins, because if we acquire a business which could be lower margin similar like Digital Risk, the blended margins could show some decline going forward, do you see that possibility? We do not envisage that possibility right now, because we are very choosy and very careful in the kind of acquisitions that we select and even if we select acquisitions where the margin profile is lower than our overall margin profile, we need to have a very clear path for that margins to improve. Like in Digital Risk, we have a very clear path. When we acquired the company they had EBIT margin of around 9-10% and we have already improved it and the clear path is to grow their EBIT margins towards 15%. Thank you. The next question is from Ashwin Mehta of Nomura. Please go ahead. Ashwin Mehta: Two questions; one, just wanted to get a clarification in terms of those 800 people in Digital Risk being moved to the contract-based model, are these people largely related to your Forensics business in Digital Risk or that is not necessarily the case? That is not necessarily the case. First of all, I want to clarify, they have not moved into a contract basis. What has happened is from permanent workers they have shifted to a status called temporary workers. These are not contractors, but they are still the employees of the company, but they operate on a temporary basis. The second clarification is we are doing this as a proactive step, because the residential mortgage market in the US is volatile and is likely to continue to be volatile in the future. So what we are doing is actually converting our entire cost structure into a flexible cost structure so that in the event of a decline in the origination market we will be very well prepared to maintain our margins. Page 13 of 17

14 Ashwin Mehta: And secondly, in terms of our Direct business ex of Digital Risk, we won close to around $70 million in TCV over the last two quarters in this business. Just wanted to get a sense in terms of the approximate deal duration of this TCV? One deal goes for 18 months, so that revenue started clicking from last year and it will continue till the end of this calendar year. The other deal was a 3-year deal and we have just started ramping up with that project in January Ashwin Mehta: So essentially, a follow-up from there is that you will have to possibly depend upon client mining to a large extent to meet your targets of 13-15% or better than industry growth rates in the Direct Channel. So, how do you see the outlook in terms of spends within your strategic relationships within the Direct Channel and what your share in terms of those spends would be possibly next year? Great insight. If you really look at the entire industry, the new logo contribution ranges between 2-4%. So if you want to grow at a faster rate, then you have to count on the existing clients. Our relationship, the work that we have done and our current state of pipeline, continues to support my point of view that on a mid-term basis we will grow faster than the market. Thank you. The next question is from the line of Siddharth Vora of Motilal Oswal Securities. Please go ahead. Siddharth Vora: I was just coming to the transfer for Digital Risk employees from permanent to temporary. Will that impact our initial thoughts on Digital Risk shifting to offshore in the long-term from its current onsite nature? That has got nothing to do with that. Let me also point out that this is a common feature of having a portion of your work force as temporary workers. All our competitors in the mortgage industry have the same structure. Siddharth Vora: Any possibility going forward of shifting the nature from onsite to offshore for Digital Risk? We do not have any plans at this point of time. Siddharth Vora: Just a bookkeeping question, what will be the tax rate you will expect going forward with this? For the next financial year that is ending on March 2015, we would expect a slight increase in our tax rate because of the SEZ tax holiday in some of our units coming to an end - 100% tax holiday coming down to 50%. So I would anticipate somewhere between 27-28% effective tax rate. Thank you. The next question is from Dipesh Mehta of SBI Cap Securities. Please go ahead. Page 14 of 17

15 Dipesh Mehta: I just want to understand about HP channel. Where we see the stability returning now the current run rate do you expect some kind of stability going forward, so broadly, what kind of outlook we are looking for let us say next 12-months? Second, on the India business, you suggest the transaction is yet not closed. So what would be the balance sheet-related impact? Let me comment on HP business. Like any other business we do not make forward-looking statements and that too customer-specific but if the past data is extrapolated the model would be based on a decline. As far as your question on the emerging business is concerned, IS India business, let me get Ganesh Murthy to answer that. Once the transaction closes we will see a reduction in our receivables, we will see a reduction in our payables. We will also see a reduction in our fixed assets, because the entire business consisting of receivables, payables, fixed assets and some employees also will be transferred to the buyer. Dipesh Mehta: So can you quantify those things? That is a very detailed discussion, but the net impact of all this is quantified in terms of the impact to the P&L. Thank you. The next question is from the line of Prakriti Banka of Pramerica Asset Management. Please go ahead. Prakriti Banka: I just wanted to know if the two large deals that you had won in Digital Risk are ramping up as expected? Yes. Prakriti Banka: Despite that, you need to move these 750 employees to the temporary basis? Again, as I mentioned, it is a proactive measure. In case, there is a decline in the residential mortgage origination market, we will be very well prepared to tackle it. Thank you. The next question is from the line of Hardik Shah of KR Choksey. Please go ahead. Hardik Shah: I just want to clarify again, the two deals in Digital Risk, of $100 million each, the size and the tenure is same, or there has been any change to that? As I mentioned one of them is for 18 months and the other one is for 3 years. So there is no change in that. Hardik Shah: No change in the deal size also, sir? No change in the deal size. Page 15 of 17

16 Hardik Shah: And sir, what is the amount of the revenue from Digital Risk in this quarter? As I mentioned, we do not publish business-wise details. Hardik Shah: Can you just give the guidance like, what is the performance of the Digital Risk in this quarter was it flat or like there was a growth in that? Again, as I mentioned, we do not publish individual business details. Hardik Shah: And sir, last question, what contributed to the growth of 28% QoQ in our emerging market in this quarter? Two reasons, one of them is because we had a certain revenue reversals in the last quarter from our India government contracts and that has reduced. The impact of that is about some Rs. 10 crore. The balance is revenue growth. Thank you. The next question is from Urmil Shah of MayBank. Please go ahead. Urmil Shah: I was just looking at the revenue run-rate of the KPO business and that has remained flat on a QoQ basis. Just wanted to get your comment on the same, because this would predominantly include the Digital Risk. It would include Digital Risk, but would also include other business we have Knowledge Process Outsourcing work in other areas. Urmil Shah: Also wanted to get your sense, the TCV this quarter is around $22 million. Have you seen the deal closure time period getting elongated or the deal pipeline, does it continue to remain much better than what it was last year? I subscribe to the fact that the deal pipeline is vibrant; however, the deal models maybe different, but the overall pipeline remains vibrant and it is definitely showing positive growth momentum compared to last year. Thank you. The next question is from the line of Ravi Menon of Centrum Broking. Please go ahead. Ravi Menon: Just a couple of quick questions. One, on the other current liabilities, there is an Rs. 800 million increase approximately. I wanted to know what that would be? And if you could provide some more color on the pipeline, which parts are you seeing the greatest traction in, in terms of geography or the vertical? Regarding the current liabilities, there is no increase at all. In fact, it is exactly the same as of last October 31 st. Are you talking about year-on-year or are you talking about quarter-onquarter? Page 16 of 17

17 Ravi Menon: I am talking quarter-on-quarter. So, there is an increase from 2,634 million to 3,427 million other current liabilities, not the overall current liabilities, that is pretty much about the same, most of the increase has come from just in other current liabilities, was wondering what that is. I think we may have to take this offline. If you look at our current liabilities in our MD&A, last quarter it was Rs.1,017 crores, in this quarter it is Rs.1,016 crores, so exactly the same. Ravi Menon: I am looking at the condensed consolidated balance sheet, that is what I was referring to. There is some difference between current and non-current, and where you have to follow the revised Schedule VI classification. So if it is current that means it is payable within a year s time and if it is non-current it is more than a year. We do an evaluation every quarter to see which of our liabilities will be classified less than 12 months and more than 12 months and that keeps changing but if you look at our overall total current liabilities there is hardly any movement. Ravi Menon: And if you could give some more color on the pipeline, which services or geography and vertical and horizontal? We are seeing a good pipeline in the North America region and we are also seeing growth in momentum in Europe. As far as the areas that are concerned, we see it across Banking, Capital Markets and Insurance and in horizontal areas, we are also seeing a significant opportunity, especially starting with the PoC as somebody has asked me this quarter earlier, in the Digital space, the whole Visual Analytics space is very vibrant, and in some cases we are also seeing opportunity for what I call as business transaction as a service or a core application software as a service. Thank you. Ladies and gentlemen, that was the last question. For any further questions you may also write to investor.relations@mphasis.com I now hand the floor back to the management of Mphasis Limited for closing comments. Thanks everyone for taking time to have this discussion with us. The coming quarter is a unique quarter because it is going to be two months. We will be connecting again very soon. So look forward to connecting with all of you. Thank you. Ladies and gentlemen on behalf of Mphasis Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines. Page 17 of 17