Will sustain margins; eyeing M&A in travel biz: Sonata

Reema: On revenue side you have seen about 14-15 decline in your domestic revenues on quarter-on-quarter basis. What led to this weakness and will it continue in the domestic revenues?

A: Our revenues consist of two business segments - the international IT services, which is our traditional IT export business and second, the domestic trading or reselling of software that we do within India.

These two are completely different sets of businesses and one has to look at them from a different perspective as far as financial results are concerned.

In the international IT services business - the revenue has gone up by 7 percent sequentially and 52 percent on year-over-year basis whereas domestic products have come down 14 percent on quarter-on-quarter basis and has also come down 16 percent on year-on-year basis.

As far as products business is concerned, it is lumpy; when we have large deals in a particular quarter, we could have higher revenues, but focus for us has always been the EBITDA margins in that business.The EBITDA margins of this business have been 3 percent this quarter compared to 2 percent in the last quarter. So, essentially margins have improved the domestic business, international IT services, the margins have improved so has also revenues grown and all in all it has reflected in higher gross margins and net margins at the company level.

Sonia: It is true that your margins in the domestic business have improved despite your revenues slowing down but to get an indication of whether this slowdown will continue or is it just a one quarter phenomenon because of the lumpiness that you spoke about. Do you expect the domestic business revenues to improve Q4 onwards?

A: The domestic revenues should improve. We do not give guidance or forecast on the domestic numbers because particularly large deals where they have a large license number being bought from us, it could suddenly lead to a spurt in revenues.

Not only that, we deal with about 19 products and principals. So, we have year ends and quarter ends for these large principles and during a particular quarter, they could do a very good promotion activity based on which a particular quarter’s revenue could be higher. But what we as a company are concerned about as far as domestic business is concerned is on EBITDA as a percentage net margin as a percentage and also the working capital and the return on capital employed (RoCe) on the domestic business. If you look at these parameters, we have performed very well compared to the last quarter and the same time last year.

Talking about how we look at quarters going forward, we are quite positive about this business and we also continue to show that positivity by investing further into that business.

Reema: Speaking about margins on the whole, they have improved quite a bit, on a consolidated basis they now stand at 8.4 percent. Where do you see margins headed in the near-term, in the next two quarters or three?

A: There are two elements to the margin – one is the IT services business where we have picked up from 16 percent in the last quarter to something like 20 percent this quarter. So, it is kind of high point of this quarter and we hope to maintain the same margin percentage as far as IT services is concerned.

On the domestic business, as one will see from the investor presentation that we have uploaded, it has been steady at about 2-3 percent at every quarter. So, that should continue and the volume growth should help us with respect to the increased margins as far as domestic products are concerned. Overall, we have reached a stable level as far as margins are concerned and quarter on quarter our attempt would be to ensure that we protect them and we also ensure that we bring in the revenue growth on the IT services business.

Sonia: You spoke about the domestic revenue improvement that we will see in Q4 onwards. What kind of average revenue run rate you think you can maintain in the international IT services business. You do not give guidance but will it continue to be in that single digit mark similar to what you saw this time or do you think you could head to 10-15 percent growth as well?

A: Quarter on quarter we should be in the single digit mark, we do not give guidance but we see decent amount of traction in our large markets of America and Europe so the percentages that you see in terms of 6-7 percent of sequential growth should not be too difficult for us to maintain going forward but year over year we have shown a growth of about 41 percent in the international IT services business and that is because of the base effect. The last year for nine month period we had lower base which lead to such a high percentage as you would notice but on a consistent basis a decent double digit growth should not be too difficult.

Reema: You are sitting on substantial amount of cash close to about Rs 200 crore odd, any plans on how you are looking to deploy this cash in your books?

A: There are two areas that we deploy the cash on our books – one is we deploy into the domestic business when there is capital shortage or working capital requirement – that is one place where we deployed and we have got return on capital employed of about 23 percent. So, that is a business we know and that is the returns we get on the cash that is deployed into that business. The second aspect of our deployment is we are looking actively for mergers and acquisitions (M&As) and these are in the territories or regions of US and Europe. We are looking for companies in the area of Dynamics AX and also in the domain of travel. The travel vertical is a very dominant vertical for us and we would like to embellish that vertical with additions. So, we are looking seriously into M&A possibilities in travel and Dynamics AX.