Quess Corp Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Profitable growth theme delivered: EBITDA grew 21% YoY and 6% QoQ as the consolidation strategy and focus on high-margin segments showed results, with all GTS businesses clocking their highest-ever EBITDA.
• Workforce platform added 26,000 associates: Headcount reached 4,30,000, driven by manufacturing, BFSI and festive-season hiring in e-commerce and logistics; open mandates stood at 38,000 heading into Q3.
• IT staffing remains the drag: Indian IT staffing and selection continues to face headwinds with flattish open mandates QoQ, though green shoots appeared in September with permanent recruitment turning EBITDA-positive.
• Foundit and North America on track for breakeven by Q4 exit: Foundit sales grew 35% YoY and the new AI-driven product enters public preview; North America burn is reducing and management expects no further losses to consolidate by year-end.
• What to watch next quarter: Whether the 38,000 open mandates convert into sustained headcount growth post-festive season, the pace of Foundit 2.0 adoption and its impact on price realization, and any concrete margin guidance now that management says it may be ready to provide it.

Workforce Management: Headcount Engine Running

• General Staffing momentum: Added 25,000 headcount led by manufacturing, BFSI and FMCG; the vertical focus strategy yielded 13% QoQ headcount growth in manufacturing and 5% in BFSI; management is confident of similar momentum in Q3.
• Festive season tailwind: Open mandates at 38,000 were driven by festive season hiring in e-commerce and logistics; the core-to-associate ratio declined marginally as more recruiters were onboarded to fulfill these mandates, and the company is retaining them post-season to meet demand from manufacturing, retail and BFSI, which will impact revenues in Q3 and Q4.
• PAPM stability: Per associate per month gross margin stayed stable around INR 700, with investment continuing in sourcing and support teams for H2 and FY2024-25 growth.
• Professional Staffing green shoots: After four to six quarters of tough IT headwinds, September brought positive signals: permanent recruitment turned EBITDA-positive with growth in permanent and lateral hiring, margins improved, and more GCC contracts are being won.
• IT Staffing headwinds persist: Indian IT staffing and selection open mandates were flattish QoQ at about 1.12k vs 1.1k; the company will continue focusing on niche profiles and IDC controls to drive margins.
• WFM margin improvement despite mix headwinds: EBITDA inched upward even with flattish General Staffing India gross margin and a lower core-to-FT ratio, because professional staffing India gross margin crossed ₹14,000, 35% of the professional staffing book is now medium-to-high margin, international business remained steady, and Quess North America reduced its burn through revenue increase and cost reduction.

Lohit Bhatia: "General Staffing works at a 2% EBITDA margin range, Professional Staffing works upwards of 7% or 8%. We have been seeing about four to six quarters of tough headwinds from the IT business with some green shoots which has come in September for sure."

GTS: Record EBITDA Across All Three Businesses

• Conneqt order book: Closed over INR 100 Crores ACV during the quarter, with BFSI accounting for almost 50% of new sales and strong recovery visible in manufacturing and services.
• Allsec CLM growth: 18% YoY growth driven by 21% YoY growth in the North American market; non-voice BPM grew 34% YoY, collections grew 35% YoY, and finance and accounting transaction processing grew 66% YoY, all on the back of sustained investment over the last three years.
• EXM market leadership: Strengthened with 0.38 crore pay slips processed, 3.5% QoQ growth, and 21 new logos added led by international sales.
• GTS margin trajectory: Delivered sustainable revenue growth with 23% EBITDA growth YoY; consistent margin improvement over the last five quarters of 183 bps demonstrates economies of scale.
• Forward focus: Sustaining non-voice BPO momentum in Conneqt, leveraging North America market growth for Allsec CLM, growing a nascent healthcare practice around anchor clients, and accelerating a new HRO product and platform over the next few quarters to consolidate market leadership, especially in international markets.

OEM: Profitable Growth with Telecom Infra Surging

• Telecom Infra best-ever H1: Revenue grew 40% and EBITDA grew 43% compared to H1 FY2023, backed by strong 5G rollouts across all operators in India and deeper 4G penetration.
• IFM growth: Revenue grew 3% QoQ and EBITDA grew 8.5%, driven by government, services and industrial sectors; 22 new customer contracts were added during the quarter.
• FMB margin improvement: Gross margin improved 10% QoQ and 33% YoY, driven by improving operational efficiencies and mobilizing contracts won during Q1; growth momentum expected to continue in Q3 on the back of new contracts in education and healthcare.
• Security business pivot: Headcount was flat as the company pursued profitable growth; a couple of major contracts in infra and manufacturing verticals were won towards the end of Q2, with headcount expected to increase 8-10% in Q3.
• Breakfix services: Saw good growth in revenue and margins as Q2 is seasonally strong for spare parts driven by revenue across partners.
• OEM margin increase aided by: Return of the food business post-academic holidays in Q1 for education sector clients, plus consolidation of low-margin clients in security and facility management businesses.

Foundit: New Product, Breakeven Promise

• Sales momentum: Sales grew 35% YoY and 20% QoQ driven by enterprise sales in India; revenue was flattish due to longer-tenure deals and lower consumption in the international market (35% of business) facing macro headwinds.
• Foundit 2.0 launch: The disruptive AI-driven product was successfully launched for private beta customers with very positive feedback; it is now in public preview with several customers using it, and all customers will be on the new platform towards the end of Q3 FY2024, positively impacting sales and price realization.
• Path to breakeven: Management remains on course to deliver breakeven by Q4 exit; the combination of the new product launch improving price realization, a focused approach to enterprise business, and reorienting marketing to a data-science-based approach underpins the commitment.
• H2 growth expectation: Growth is expected to continue robustly in H2 as the base effect kicks in and the new product launches; Q3 and Q4 are historically significantly higher than H1 due to the advance subscription business.

Kamal Pal Hoda: "It is a little difficult to tell you right now, but I think the management intent and the guidance's that we would like to breakeven foundit by the end of Q4 quarter..."

Margins: Absolute EBITDA Over Margin Percentage

• EBITDA margin drivers: The increase in EBITDA margin was driven by a customer margin drive across businesses including cost-to-serve reductions started a couple of quarters back, and reduction of burn in the product-led business.
• PAT growth: 79% YoY and 47% QoQ on account of healthy EBITDA growth across all businesses, an increase in other income by way of interest on tax refunds, and deferred taxes.
• Consolidated margin decline vs FY2022 explained: The decline from 5% to 3.5% is because General Staffing (2.2% margin, negative working capital, annuity business) has been growing strongly, while high-margin businesses like GTS and OEM have contributed; Foundit investment mathematically lowers overall EBITDA margin but is offset; with Foundit and North America breakeven expected, a margin uptick will come.
• WFM aspirational margins: Aspirational EBITDA margins of 6% (achieved before); once North America and product-led businesses achieve breakeven, from next year onwards the company should see likely around 1.5% EBITDA margin improvement.
• No specific margin guidance yet: Management cannot give specific margin guidance because General Staffing (2% EBITDA margin) is the biggest growth driver; focusing on margins loses sight of absolute EBITDA growth, which increased 21% YoY even though margins have not improved; by next quarter they may be able to give better guidance.

Kushal: "when you focus on margins you lose out on the absolute EBITDA growth that the business has been delivering and overall, on a year-on-year basis our absolute EBITDA has increased by 21% even though our EBITDA margins have not improved."

Structure Simplification & Tax Updates

• SLPL write-off: An exceptional loss of INR 14.3 crore was taken due to structure simplification; Quess acquired the initial 53.9% stake in Stellarslog Technovation Private Limited (a gig platform matching task doers and task givers), then acquired the balance full stake and revalued the company at fair value on the date of the balancing acquisition; the business, with annual revenue of about INR 7 Crores, was integrated back into Quess workforce this quarter.
• Conneqt/MFX/Greenpiece merger: NCLT admitted the petition and the hearing was completed on 31st October 2023; the final order is awaited and the transaction is expected to complete within this financial year.
• Income tax matters: For FY2017-18, the appeal is at ITAT with the next hearing expected in the current month; for FY2018-19, the DRP hearing is completed and the final order was passed on 30th September 2023, disallowing EAA and depreciation on goodwill (same grounds as previous years), now going to tribunal; for FY2019-20, the special audit proposal was dropped and the draft assessment order was passed on 29th September 2023, with the company filing objections before DRP on 27th October 2023; all three orders are consistent.
• Vedang stake acquisition: The remaining 3% stake in the subsidiary (92.5% held prior) was acquired per the 2017-18 share purchase agreement put option; no fresh valuation; the company is going through a strong phase of 5G transition.

Guruprasad Srinivasan: "So, we integrated that back into Quess in this quarter and the business has annual revenue valuation of about INR 7 Crores and this was the right time for us to integrate into Quess."

Guidance & Commitments

Key Metrics