Indegene Limited analyst Q&A

Thank you. The first question comes from the line of Ahmed Madha with Unifi Capital. Please go ahead.

Trying to understand the P&L better, both for the Q2 and the comment you mentioned about 1.5% margin reduction, right? So in Q2, even adjusted for M&A expenses, the opex, other expenses rate is quite higher compared to historical rate and there has been an increase. So you can give some granular sense what explains the increase in the expenses. That's first. And second, in terms of employee cost front, you can give some sense of the hikes, which we have taken post June, which is reflecting in Q2. And coming to the comment you mentioned about 1.5% margin reduction, can you give some sense next 2 or 3 years, how do you see the margins range changing and what all initiatives we'll be taking, which is reflecting in your margin guidance?

I'll let Suhas handle it, but let me just start with the last one. The margin reduction in the very near term, let's call it, next quarter, is primarily because of these investments we have made, and we believe in the next 6 to 8 quarters, we should get it back to the levels, which we've been operating at. With that, Suhas, I'll pass it on to you to break it down to some more details.

Sure, Manish. Thanks, Ahmed, for your question. So the other expenses that have increased have largely 3 components of increase, one which I already mentioned earli er, which was approximately USD0.5 million of M&A expenses, which are largely diligence fees, legal fees and the like, which were incurred in relation to work that was completed by 30th September for the 2 acquisitions that we concluded eventually in October. The other major component was the IDS or the marketing event that we had in Philadelphia in September. in physical form and approximately $0.5 million of expense in the event combined with a little around, say, $0.1 million of travel cost was the other component. And finally, about $0.25 million of technology costs, which increased quarter -on-quarter given higher investments, especially in the GenAI subscriptions and the related cloud infrastructure, all of which that I mentioned is part of the other expenses. Now coming to your next question, which is on the increment. At Indegene, our annual increment is effective July every year and this year also, so effective 1st of July 2025. The increments in the past have resulted in a 2.1%, 2.2% per dilution in margin r ate from -- on a sequential basis. And even in the current year, this is in the similar range, around 2.1% is the impact of the wage bill increase. And what we typically see is that progressively, the margins tend to increase here on. But every year, again, in that July period, given that it's an annual increment cycle would see a decline in margins. But this is nothing out of ordinary for Indegene if you look back into our past. So I hope that clarifies the questions that you had, Mr. Ahmed.

Yes. I get the sense. Second question was to understand the business mix in terms of top clients, right? I mean, the commentary in last quarter or so was that the pain in the largest client is behind us, but it seems there has been some degrowth again in Q2. So you can give some sense how is the conversation with your top 1 or 2 clients? And how do you see those clients coming back with either new orders or the contract renewals?

Yes. So Ahmed, our top 5 customers, what we have seen in the past, our largest customer has been steady to growing in the last 6 quarters. A couple of earnings calls ago, we had mentioned that our largest customer, one of the contracts that was renewed had a change in the mix from onsite to offshore for certain roles. And therefore, we would anticipate a reduction in the revenue, while it would actually be in the longer run positive from a margin perspective. And therefore, that's the only major impact. And this is not related to any challenges that we had seen with a couple of other customers. And as you observe in the current quarter, the top 5 has actually grown by 4.6% sequentially, which is consistent with what we had mentioned that we see that the pain that we had with a couple of customers is largely behind us and things are back on track and growing.

I also want to emphasize that as to us in large 5 -- top 5 customers, we don't see any broad headwinds. The largest customer, this engagement was called out in our, I think, end of Q4, if I'm not wrong. However, in our largest customer, we see -- we have a pretty strong pipeline, and we are very bullish about growth in the, I would say, near to midterm itself.

Last question from my side. In terms of headcount addition, how do you see the trend in the near to medium term, considering we have made a lot of investment in terms of productivity, AI and stuff, right? So how does that sort of transition into headcount addition? We have been seeing last, I think, 3 -odd quarters, there have been incremental addition. After I think FY '24, there was headcount cut and then in the first half of '25 also, there wasn't much addition. In last 3, 4 quarters, we have seen the trend of headcount addition. So how do you see that number panning out in terms of increasing headcount?

So I'll again comment and then pass it on to Suhas. We believe our revenue per employee, which is -- I would guess that it's highest in the industry. We believe securely, it will inch higher, right, which means that we will add employees, but obviously not at the same rate as our growth rate. So Suhas you want to get slightly more specific?

So continuing on what Manish mentioned, yes, we would continue to see a growth in the number of employees, but the rate of growth of the number of employees would typically be lesser than the rate of growth of the revenue, and we should see that reflecting in a higher realization at employee level. One of the things that we are doing actively is also investing in talent ahead of the curve given the kind of activity that we are seeing in the deal wins as well as the pipeline that is building out and using this opportunity to onboard people and train t hem ahead of when we anticipate the revenues to come in.

Just wanted to get a note on the incremental growth that the company might get, say, in the coming Q3, Q4 and, say, in FY '27? And how much growth are we anticipating from the 2 new acquisitions that we have made? This is my first question. And secondly -- and the second question on the margin compression. So we will be facing around 1% to 1.5% of margin compression. So are we taking any steps to ensure that maybe, say, in the couple of next quarters, the margin reduction that we'll have, we can make up a bit of that. So that was from my end.

Let me start with the last one and go in reverse way. The reason we are making these investments is that we see a market opportunity right now. We believe that while there are -- these investments are being made a bit of ahead of the curve, by growth itsel f, most of the margins will come back on track. Beyond that, we obviously continue to rationalize across the board, right? And this is something we have done many times in the past that when we see the market shifting right into positively, then we invest to capitalize on this opportunity. So we believe margins will come back, as I said, in the 6 to 8 quarters. Suhas, do you want to again double click or anything?

Manish, you have already mentioned, as we have done in the past, while we invest, we also relook at areas that we can optimize while we continue our initiatives on productivity and efficiency. And given our engagement model, which is a hybrid construct of time and material, but a larger construct of catalog pricing or output -based pricing, we believe that we have sufficient levers to be able to impact productivity, which results in better margins for us. And that would be the other lever to ge t us back into the range that we have been operating in the past, which is around 20% and a little north of that. That I understand.

And sir, just last question, if I could ask is for the coming quarters and maybe for the next year, what kind of growth are you anticipating for the overall business?

We don't give guidance. That's something which we have carried on. All I can share with you is that we are seeing the market open up, right, at this point of time. But guidance is something which we don't do. Again, Suhas, do you want to comment on this?

You mentioned Manish -- Divyansh, again, we won't get specific as we don't give guidance. But we certainly are looking forward to a growth rate, which is higher than what we saw in the past year and even the start of this year.

Next question comes from the line of Sameer Dosani with ICICI Prudential AMC.

Just to clarify on this margin piece again. So last year, we did 19.5%, closer to 19.5% margin. So one should think 1.5% decline or there are offsets like this is the gross impact and there will be offsetting cost measures that can help the margin? That is my question number one. And also, -- yes, so this is first question.

Yes, Sameer, thanks for your question. As I already responded to Divyansh, there are opportunities to offset and we will be acting on those as well. And therefore, there will be potentially some offset, but that would also be progressively through the quarters. It wouldn't -- there's unlikely that the offset would be achieved within 1 or 2 quarters.

And I should take it from FY '25 base, not from Q2 numbers, right?

From the current quarter, these would be likely impacting us on a go -forward basis rather than maybe the cumulative.

Sorry, like, so the FY '26 margin ballpark guidance...

For H2 and not on a full year basis.

So H1, we have already done, if I add back the M&A, 19.2%, then one should take 1.5% impact on this 19.2%, which is 17.7%. Second is when you consolidate this BioPharm, right, would you be taking net revenues or gross revenues because that -- yes. And thirdly, I couldn't understand this ACV remark. So 4 deals in 1 million to 3 million range. But 3 million, how many deals have you signed, 3 million plus ACV?

So the $3 million plus, it was 2 deals and $1 million to $3 million were 4 deals. Hopefully, that clarifies. And Sameer, what was your other question?

Whether we will take net revenues of BioPharm or gross revenues because the net revenues are around lower end?

Yes. We would -- as per accounting standards, we would have to report gross revenues. However, we would also be disclosing the net revenue.

And lastly, like what you have seen in the past is on the growth side, right, H2 is seasonally stronger for us in terms of organic growth. So does that things plays out? And also, I think this -- the deal that you disclosed and when I calculate this ACV is around 14 million at least, right? So how does this compare with maybe last year we have done 14 million each in Q1 and Q2. How does this compare versus the last year?

Versus the previous year, this year has been an increase in the deal closures. It is quite similar to the deals that we closed in Q1, maybe marginally higher.

And seasonally, H2 will be stronger in terms of growth versus H1, that is what you have seen normally and we would be commenting on. So should we see a similar phenomenon this year as well.

Again, the business doesn't have any specific seasonality, which is material. But having said that, unlike if we were to look at IT services, given our engagement model, we are not impacted adversely by furloughs or lesser number of working days in February and the like. And therefore, we believe that there's nothing -- and also given the deal pipeline and so on, we don't believe that there'll be anything outside of what we have seen in the past as well.

Next question comes from the line of Deep Shah with B&K Securities.

So we've seen some growth assumption this quarter. And if I hear Manish comments at the start of the call, it seems that some of the disruption or some of the uncertainties, which are keeping brands on the fence are getting gradually resolved. Now what I understand is whenever there is some disruption, it is that time when we gain the most, at least that's how history has been? But it, of course, comes with some lag. So if -- I don't expect guidance, but if you could give a slightly qualitative answer about how historically has that conversion been? And do you foresee some of it to come by, say, in 12 months or in 24 months? Some qualitative understanding around this could be useful. Secondly, as a subtext to this question, the kind of disruption that we've seen in the past, these ones would be pretty small compared to them. Would that be a right assessment? Or these disruptions and these solutions are also materially large enough to change the trajectory for us?

I can take a shot at answering this. First of all, typically, what happens is the reason we -- and you should look at our comments holistically. One is about the industry in general, the macro environment, which I spoke about and the very specific things w hich we are seeing related to our space, right? The reason we gave this commentary is that there is so much announcements around the pharma industry, right? And of course, if there is massive disruption, right, in at least the short term things come to a freeze, right, in many of these companies. And which is what we wanted to call out that doesn't seem to be the case, that dust is settling down. Now combine that with a comment I've been making for a very long period of time in our calls that we believe that drug prices are secularly under -- going to be under pressure. right? We made this comment much before any of this thing has started. And what you are seeing is a validation of that, right? If drug prices are going to be secularly under pressure, companies will have to continue to become more efficient and effective. That plays squarely into our positioning, right? That's where we step i n where companies are saying that we will have to decide that they have to run their medical and commercial operations in a much more efficient way, and that's what we offer. Now tie this to what I'm saying is that we see customers who are slightly -- who are obviously after the huge COVID wave consolidating, they're coming back now to the table in terms of saying how can they move us upstream, how can they get it laid downstream, right? In IDS, we heard themes like no rep launches, right, all kinds of things. So we're seeing customers now opening up and thinking about where do they take their various strategic digital initiatives in. And of course, AI is becoming another big driver for that because they believe that much more can be done using AI. I hope that answers your question.

Next question comes from the line of Vijay Menon with Monarch Capital.

Just a few things. One is on Tectonic, you had mentioned in Q1, we had closed $1 million deal. So any progress on that? And have we been able to get more deals on that?

Suhas, do you want to take it?

Yes, Manish. Yes. Certainly. Thanks, Vinay, for your question. So Tectonic even in the current quarter has clocked close to $1 million in revenue. And therefore, for the first half, we've clocked $2 million in revenue. The encouraging part with Tectonic has been that in the current quarter, 2 more customers have become paid -- paying customers, though at a very small level at this point in time, but the encouraging part is that from unpaid pilots, we managed to convert 2 more customers into paid projects, but it's still very early with them, but that's an encouraging sign. And having said that, the pipeline with the 2 customers that we were already having revenues in Tectonic starting last quarter. The pipeline is building up very fast. It's looking very promising. And we are hopeful that in the current quarter, we would be able to close a lot of that pipeline given that a lot of this planning especially for longer-term engagements tend to happen with the planning cycle of our customers. And in this case, also is Jan to December planning cycle. We are hopeful of those conversions happening by the end of December, if not maybe early January, but for this renewal cycle, these should be the incremental scope of work that we've signed.

And one more thing. I just want to ask on the brand activation part. So in Q1, you had mentioned that there was some project deferral and a large project also closed. So any strategy to revive this segment or...

Yes, Vinay, and the impact of that was partial in the last quarter and continued the full quarter impact in the current quarter as well. But having said that, there's a significant effort on new engagements and so on and we have a good pipeline that has be en built up. Unfortunately, has taken more time to close than we anticipated, but there's a healthy pipeline, and we are hopeful to see those convert in the current quarter. One other thing that I would want to refer to is in the last quarter, we had also mentioned that there was a win for the Brand Activation segment, which has just taken off in the current quarter, but a significant ramp -up will be there in quarter 3, which would partially fill in the degrowth that we are seeing from the project that ended in Q1.

Next question comes from the line of Prakash Kapadia with Kapadia Financial Services.

I just had one question. If I look at the H1 operating cash flow, it has actually improved from INR1.35 billion to INR2 billion. Receivables have come off in first half, and they've been declining as a trend over the last 2, 3 years. So what is leading to this decline? And can they further decline as we move towards the second half and beyond?

Thanks, Prakash, for your question. As far as cash flows and more importantly, the AR levels are concerned, there's a bit of a seasonality in our business. Typically, in December, we have a peak in terms of invoices that we send out and that results in a higher DSO, higher AR levels in December. It comes down a little in March, given that a lot of that converts to cash flow with a 60- to 90-day credit period. But 90 days sometimes moves into beyond March from a collection perspective and tends to be a little more elevated levels of AR in March, while typically June and September quarters are when these are not as elevated as the other 2 quarters. That's a bit of seasonality on the invoicing and related cash flow that we have experienced in the past.

But you mentioned typically like the IT companies, you don't see a seasonality as far as revenues go. So why does that seasonality happen in terms of the billing cycle?

Yes. So to further clarify, while our revenue doesn't get impacted -- from an invoicing perspective, we see a bit of slowness in the July, August period, which is summer vacations in Europe and U.S. And what we have as a practice at Indegene is to get customer consents before we send out the invoices. And these holidays tend to delay it. But at the same time, there's an acceleration in the invoicing in the quarter ending December. Many of our customers in December want us to send invoices ahead of their year-end rather than in normal course, which would have gone, say, the first week of th e next month, and that tends to elevate or increase the level of AR in December, whereas the reverse happens in the quarter ending September, given that there are more holidays and unavailability of the customer tends to delay the invoicing cycle by a bit. But that has no impact on the revenue. So there's no impact on the revenue from a seasonality perspective, but there would be an impact on the invoicing and related due dates, which impacts the cash flow.

Next question comes from the line of Chirag Kachhadiya with Motilal Oswal Financial Services Limited.

I have just one question. Considering the challenging environment for the pharma sector in the U.S. and whatever we have witnessed in past 1 year, can you share some qualitative insight, the type of conversations, which are ongoing with the client and the type of solutions, which they are asking and which they were asking a year back or 2 years back? Any change in the behavior in this client pattern or if you share some qualitative insight that would be useful.

Sure. So I can start off with that. Actually, the earlier part of my commentary was that there have been a lot of headlines announcements. But over the last few, I would say, months, right? But in general, the uncertainty now on the pharma industry seems to be -- seems to have reduced, right, very significantly. So companies continue to progress with their regular plans. What has changed is pharma had a super active period for a couple of years during COVID, right, in terms of drug launches, various other things, obviously, digital acceleration. And they took -- after that, they went into a phase of slow growth in 2023, if I'm not '23 and a little bit of '24, but they are also doing consolidation of all the activities they had done. What we see is that phase seems to be over, and they are back in terms of figuring out, seeing and expanding the scope of their centralization and digital initiatives they had taken at a central level, right? Tectonic as a result of that, we see multiple o ther things happening similar to that level. We also see companies exploring the potential of AI-driven broader initiatives, right, much more than what we were seeing, let's say, call it, 12 months back. But it's still early days and this industry will be circumspect, but we're seeing many of those c onversations. So overall, we see from a demand perspective or quality of engagement perspective, the environment to be much stronger than it was 12 to 18 months back.

Ladies and gentlemen, due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.

Thank you, moderator. We thank all the participants for attending this call and spending your precious time with us. We also appreciate your continued interest in Indegene and such interactions with you. We hope to continue that in the future. And with that, we'll close this call today. Thanks, and have a great day.

Thank you...

Thank you.

Thank you. On behalf of Indegene Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.