Quess Corp Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Margin recovery underway, led by mix shift: EBITDA margin improved QoQ, driven by a deliberate pivot toward higher-margin international business, cost optimization, and the planned reduction of Foundit marketing spend.
• Workforce Management margins at a perceived floor: General staffing margins compressed to 2.6% on wage inflation and flat-fee contracts, but management called this "probably the bottom," expecting improvement as the higher-margin professional staffing mix grows.
• Foundit on the cusp of breakeven: The business halved its operational burn QoQ while growing revenue 9% YoY; management reiterated it is on track to hit breakeven in Q4, after which incremental revenue should flow disproportionately to gross margins.
• OAM resetting for growth after account rationalization: Revenue was challenged by the deliberate exit of low-margin accounts, but margins expanded on a better business mix; a pipeline of 13 contracts worth INR 75 Crores in ACV is set to mobilize in Q4.
• What to watch next quarter: Whether Foundit achieves its promised Q4 breakeven, the pace of WFM margin recovery as professional staffing outgrows general staffing, and if OAM can convert its Q4 pipeline to return to top-line growth.

Margin Trajectory & Profitability Drivers

• Mix shift toward international business: The largest single driver of margin improvement is the movement from domestic to international revenue, which was previously a 50/50 split and is now tilting toward international. Conneqt Digital and Allsec are growing their international CXM business disproportionately, carrying higher realizations and margins.
• GTS profitability improved: Non-voice services and an improved international mix in new CXM sales, combined with cost efficiencies from the Conneqt merger, helped increase overall platform profitability.
• OAM margin expansion: Margins were aided by rationalizing low-margin contracts, implementing price hikes where possible, exiting unprofitable accounts, and a business mix shift toward the higher-margin food business (now ~20% of contribution) and telecom (11% EBITDA margin on 5G rollout). The core-to-associate ratio improved to 105 per FD.
• Foundit burn halved: Operational burn fell by more than half QoQ as marketing spend tapered after the Q2 product launch, while revenue continued to grow. The cost structure post-breakeven is expected to remain largely flat outside cost of sales.
• WFM margin compression: General staffing margins fell from 2.8% to 2.6% over 12-15 months because most contracts are flat-fee: when revenue or wage inflation rises, the percentage margin declines even though absolute rupees are accretive. Professional staffing and IT staffing also saw a declining trend over the same period due to broader market headwinds.
• Investment in manufacturing weighs on WFM: In the MNI segment, Quess is displacing 10-30 year incumbent local contractors, requiring upfront investment in recruiter density, sourcing, and on-the-ground presence that keeps margins soft during the start-up phase.

Lohit Bhatia: "This probably the bottom of where WFM today is."

Workforce Management: Growth & Structural Trends

• Headcount addition led by manufacturing, telecom, BFSI: General staffing added 13,000 headcount, with manufacturing and construction now the third-largest segment after BFSI and retail. Growth is aided by India's transition to a services-cum-product economy, the informal-to-formal shift, rural-to-urban migration, the PLI scheme, and government infrastructure development.
• 30% of new clients are first-time outsourcers: A significant portion of new client additions are companies using a staffing outsourced model for the first time, validating a long-term trend toward outsourcing and consolidation from the informal to formal sector.
• IT staffing remains under pressure: The vertical continued to be impacted by global headwinds; the focus is on niche profiles in BFSI and digital, and on maximizing margin.
• Revenue growth driver is wage inflation plus sales: Workforce Management revenue growth is driven by a roughly 70:30 mix of wage increases and sales volume growth, but because most contracts are flat-fee, the same dynamic pressures margins.
• Pricing strategy expected to evolve: Management believes that at some stage, both clients and competition will move away from a pricing-only strategy toward a service-and-price strategy, which would support margin recovery.

Lohit Bhatia: "This a segment to continuously keep watching for at least a decade as far as India is concerned."

Foundit: Path to Breakeven & Post-Breakeven Economics

• Revenue grew 9% YoY despite IT slowdown: Enterprise sales in India drove growth even as the broader IT market remained soft.
• Foundit 2.0 launched to 550+ customers: The AI-driven product was acknowledged as best-in-class in initial feedback, with a target to roll out to every customer by the end of Q4.
• Breakeven expected in Q4: Management confirmed the business is well on track to meet its outlook, with the burn reduction and revenue trajectory supporting close-to-breakeven performance in Q4.
• Post-breakeven operating leverage: Once breakeven is achieved, the cost structure remains largely flat except for cost of sales. Incremental revenue is expected to add disproportionately to gross margins, and the business is expected to grow fast from that point.

Sekhar Garisa: "most of the top line that gets added from that point onwards adds disproportionately to our gross margins from there on and therefore we expect the business will grow fast"

OAM: Reset & Pipeline

• Revenue challenged by deliberate account rationalization: Growth was held back by the exit or rationalization of a few large, low-margin accounts.
• Margin improvement from mix and efficiency: Profitability was aided by a shift toward the food business (gross margin improved 18% QoQ on operational efficiencies and contract mobilization), telecom (ahead of AOP targets on 5G rollout), and customer margin initiatives across the platform.
• Sector exposure deliberately diversified: Pre-COVID, integrated facility management exposure was heavily weighted toward IT/IT services. That has been reshaped: manufacturing now tops all segments within facility management, followed by healthcare and BFSI.
• Q4 pipeline is promising: 13 contracts with an ACV of INR 75 Crores are expected to mobilize in Q4, and the focus is on adding new clients to set the base for the next financial year after three quarters of swapping unprofitable accounts.
• Telecom 4G rollout contract: A significant contract with an ACV of over INR 90 Crores was awarded; deployment begins in Q4.

GTS & CXM: International Growth Engine

• Conneqt maintained momentum: The business added 16 new clients and consistently ranked first or second among partners where clients onboarded multiple vendors.
• International CXM growth to continue: Revenue realization from leading North American customers is expected to drive continued momentum in Q4, supported by solution partners tied up in global markets.
• GTS margin confidence: Good order pipelining in Q3 across infrastructure and digital IT services, including from the Middle East, gives management confidence on both growth and margin profile heading into Q4.
• International business growing at ~30%: Management believes it can maintain this growth rate in the international segment, which carries a higher margin profile than domestic business.
• AI-forward BPM engagements: The BPM business is currently running 10 AI-forward engagements with clients and will focus on expanding that number.

Tax Litigation & Audit Qualification

• 80JJAA tax disputes span multiple years: For FY2017-18, an appeal is in ITAT with the next hearing expected in April 2024. For FY2018-19, an appeal has been filed in ITAT with a hearing scheduled for February 2024. For FY2019-20 and FY2020-21, the special audit proposed by the tax office was dropped based on factual representation; a draft assessment order has been passed and the company has filed objections before the DRP.
• NFRA order stayed by Delhi High Court: The National Financial Reporting Authority issued an order relating to certificates for certain years regarding 80JJAA claims. The order was subsequently stayed by the High Court on jurisdictional grounds of NFRA over the chartered accountant.
• Qualified audit opinion triggered this quarter: The qualification relates to uncertainty around the outcome and timing of the 80JJAA tax dispute matters. The financial impact is already disclosed as a contingent liability. The company continues to believe its claim is valid and intends to vigorously contest its position on merit, including judicial precedent.
• One-time non-cash impairment: A non-cash charge was taken on goodwill from the original investment in Hexagon, triggered by an internal restructuring where Hexagon's business contracts and employees were novated and transferred into Quess, combined with Conneqt merger synergies.

Guidance & Commitments

Key Metrics