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00:00 Hello and welcome to BQ prime you are watching IPO Adda and my guest today is from updater
00:05 services it's a company which is involved in business and facility management services
00:10 with pan India presents. Its IPO is opening on 25th of September closing on 27th price
00:18 between 280 to 300 rupees fresh issue of 400 crores and OFS of 240 crores so the total
00:24 IPO size is nearly 640 crores and joining me is Mr. Raghu Nandana Tangerala who is the
00:30 chairman and managing director of the company and Balaji Swaminathan who is the chief financial
00:34 officer of the company. Gentlemen thank you very much for joining us on BQ prime. My question
00:39 first to you Mr. Tangerala you are raising 400 crores in the IPO as fresh equity what
00:46 is the purpose of that? We had mentioned in our RHP but anyway you ask about 150 crores
00:56 for retiring debt then about 100 or 130 crores for future working captain and about 80 crores
01:06 of blind pool for inorganic and the balance is for general purpose. Mr. Swaminathan he
01:14 spoke about the retiring debt what is the kind of debt that you are holding in your
01:17 balance sheet both current and non-current together. Current and non-current together
01:24 we have about 172 crores as at March 23 and out of which 133 would get retired from the
01:30 process that we get from the IPO. You have mentioned that you need a 115 crores in working
01:36 capital it's a services industry who is very rare to see services industry requiring a
01:43 higher working capital requirement what is the reason for that? The services industry
01:50 here the people cost is the major cost where you do not get the credit unlike other businesses
01:55 and the credit period that we offer to the customers we have to fund for at least couple
01:59 of months one running month and the one based on the credit period. So that is the reason
02:03 why we would need working capital in the services industry. So if I am correct you need you
02:10 have this entire period of nearly three to four months for the services that you offer
02:17 and the revenue that comes from it? Not three to four months so it would be closer if you
02:22 take the net working capital it will be closer to about say 75 80 days is the working capital
02:28 that we put. Is the entire industry works in that kind of working capital cycle in the
02:33 sense 75 to 80 days kind of thing? Yeah it would because one month is a current running
02:39 month salaries I have to pay and similarly one is the billing and then I have to wait
02:43 for the credit period to collect. So in that sense including unbilled it would be the similar
02:46 number. Mr. Tangirela you know I was looking at your
02:51 growth it's been a very aggressive growth in the last three years but it's mainly led
02:57 by acquisitions in the last three to four years you know from FY 19 to 2023 four acquisitions
03:04 you have made and that has helped you push your revenues also higher to over 2000 odd
03:11 crores. My question is that you know is this the kind of growth strategy that will play
03:16 out going forward? It would be the strategy but it's not could
03:23 not need not be the same scale. However since you mentioned it even organically we've grown
03:29 about 15% and minus the COVID year or COVID two years we've done about Balaji what about
03:38 25% growth 20% around 20% CAGR I'm talking organic without the acquisitions.
03:47 Okay so the 40% jump in revenue that has happened between FY 22 to 23 you're saying that around
03:54 half of that would have been through organic and the half would have been through inorganic
03:59 growth coming in. How easy it is to scale up in this industry because you are a manpower
04:06 driven industry and it requires skills as a some bit of skills as well. So what is the
04:11 kind how do you plan out your manpower requirement and how do you train your skilled employees?
04:20 You know this is our business so this is what as a strength we keep doing this this is what
04:25 we've been doing all our life. We've got sourcing teams in every state we've got sourcing teams
04:32 where it's labor surplus states and we have a strategy on this so every day we recruit
04:38 there's a training happening across the country. So this is our business this is our strength.
04:46 Mr. Swaminathan can you give us a sense of what kind of salaries or packages is what
04:52 you give your employees what is the average salary for the facility management manager
04:58 or the worker who's working in there? Look I would look at the whole thing split
05:04 it into to put it into perspective so one is on the IFM business where the salaries
05:09 are pretty much more closer to the or slightly above the minimum wages which are required
05:13 under the statutes and when it comes to BSS the kind of employees and the skill set that
05:19 is required is much higher than what IFM is so in that sense there the salaries are much
05:23 higher than the minimum wages. So on IFM side you would see an average of say depending
05:31 upon the state maybe around say a 20k 15 to 20k would be the range depending upon the
05:37 state and with respect to the BSS it would be the lowest itself would be upwards of say
05:44 25 or 30k. And how has been the you know wage cost inflation
05:51 that has come in you know we have seen post COVID there has been a lot of inflation coming
05:56 from wage costs across the board across industries how are you managing that and what is the
06:01 kind of wage hikes that comes in because since you are in the services industry and you have
06:06 nearly what 65 or 1000 employees with you how do you manage that wage cost and what
06:11 kind of wage hikes that we see on an annual basis?
06:17 Yeah look whatever is the increase that is there which is as per the industry that is
06:21 there but again just to highlight here the contracts that we have with our customers
06:25 are executed negotiated in such a way that any increase in the minimum wages or the statutories
06:32 also gets built to the customer and apart from that I would have my margins that we
06:36 need to build. So in that sense the inflation will not have any significant or a major impact
06:42 on our numbers. So these are more as part of my cost which are pre agreed with the customers
06:47 to be built with the backdoor.
06:50 Mr. Swaminathan you know the statutory wages have not been high for many years now right
06:56 means we have not seen year on year hikes that comes in for statutory minimum wages.
07:02 So in that sense how do you manage hikes because how do you manage the churn that happens because
07:08 I understand the churns are also very high in this industry. So how do you manage that
07:12 as well?
07:15 So just to add there I will just chip in. I haven't seen in the last 10 years where the
07:22 increase has not happened. In fact I have only seen it happening more and more. Earlier
07:26 it used to be roughly about 3 to 4 percent now the average is 5 to 6 percent. At no year
07:32 I have seen where the wage hike has not happened. In fact in many states it is twice in a year.
07:43 And like what Balaji said it is a pass through for us.
07:47 So and it is built in your contracts when you do that?
07:54 It is built in your contracts wage hikes are built in your contracts?
07:58 Yes yes yes yes they are.
08:00 So in that sense what is the kind of margin that you keep between the cost to the client
08:06 and between yourself?
08:10 We roughly operate in the IFM space I am not talking of the BSS space around 10 to 11 percent
08:17 gross margins.
08:18 And in the BFM space?
08:23 It is anywhere between 18 to 22 percent because there are different businesses.
08:27 Give me a split of both the businesses how much of revenue comes from IFM and how much
08:31 from BFM?
08:33 March 23 we had about 1800 crores from IFM.
08:44 So just to give you a split so it is about 22 percent has come in from BSS and the balance
08:51 the 78 percent is coming in from IFM sorry 72 from IFM and 28 from BSS.
09:00 So in that sense is the endeavor to go more lean more towards the BFM business which has
09:06 higher gross margins going forward?
09:10 Absolutely that is the strategy.
09:12 So you are and also if at all we are doing some inorganic acquisition it will happen
09:16 in that space.
09:17 Just to put it in perspective IFM is about 5 percent margin business or BSS is about
09:24 anywhere between 14 to 15 percent margin business.
09:30 Give me a sense of your EBITDA margins Mr. Swaminathan because I was looking at your
09:34 numbers at 2100 odd crores of revenues EBITDA was around 92 and a half crores that gives
09:42 an EBITDA margin of 4.4 percent core EBITDA margin I am talking about here versus 5.3
09:49 percent last year.
09:50 So EBITDA margins have contracted over last financial year.
09:53 What is the reason for that?
09:56 Yeah so look the way over a period from 20 if you look at the EBITDA margins have moved
10:02 from 5 percent to about 6.8 or 6.9 in 2023.
10:07 And this is primarily what you have what you are seeing as a reported EBITDA has got a
10:11 couple of components which are there as we have explained in our document as well which
10:15 is relating to a fair market value February adjustment for the liabilities that we need
10:20 to pay for the promoters.
10:22 So which is more of a capital nature but having considered the index the way the accounting
10:26 is done so that also gets into the P and L because of which the EBITDA is the reported
10:31 EBITDA is contracting.
10:33 So otherwise if you look at between FY 22 and FY 23 our adjusted EBITDA has moved from
10:38 108 crores to 145 crores.
10:41 So there is an improvement and there is an increase and the percentage wise also it is
10:44 more or less around 7ish.
10:47 So we need to just take this perspective and there would be a similar implication on the
10:52 PAT as well when we look at these adjustments and then.
10:55 Give me a say give me can you elaborate a little bit more on these adjustments and how
10:59 this is done especially the one related to promoter.
11:05 Yeah so this is basically relating to the acquisitions that we have done.
11:08 So these are committed acquisitions that we need to go ahead and acquire 100% and generally
11:12 we do a tranche acquisition.
11:14 In the first year we would do a majority and then over the next 2-3 years based on the
11:19 earn out model we will be acquiring the balance take from the existing promoters.
11:23 And if the subsidiary is performing so actually it is a good to have a problem I would say
11:29 because subsidies are performed much better than what we have estimated in the initial
11:34 time when we have acquired.
11:35 So because of which what happens is at the time of acquisition on the date of the acquisition
11:39 we would estimate what the subsidiary would do and based on which the total consideration
11:44 is taken as a liability.
11:45 And now because they are doing better than what we have estimated there is an increase
11:49 in the purchase consideration that needs to be paid and that needs to be fair valued at
11:53 every period and when we do that there is a additional payout that is coming in that
11:58 needs to get into the P&L.
12:00 I will not be able to go back and increase my investment value.
12:03 So because of which it is impacting the reported EBITDA and ideally if you look at it this
12:07 is more of a capital nature this has got nothing to do with the operations.
12:12 So give me a sense of is this going to be there for the current financial year or the
12:18 financial year later because you said that the acquisitions are based on tranche and
12:22 you take the majority at the first go and then you take it in tranches.
12:26 So how many tranches will it be and will this have an impact in the current financial year
12:30 or the coming financial year?
12:34 Yes there would be some impact assuming they are performing better but again this quantum
12:38 will come down because every year when I am acquiring the additional tranches only for
12:42 the balance this would have an implication because I have already crystallized and paid
12:45 for the already concluded tranches.
12:48 So in that in that sense the number would be lower than what it is there in the current.
12:54 What would be the total liability outstanding liability in this in this regard?
13:00 Let us say as of 31st March 2023 it is about 175 crores which is there which needs to be
13:05 paid for two acquisitions which is Deneve and Athena.
13:08 And Athena.
13:09 Yeah.
13:10 So one.
13:11 Both are yeah Deneve and Athena both are into sales enablement.
13:15 So this is 175 crores right that is what I heard.
13:20 So it has to be portioned over the next couple of years basically.
13:25 No this is the total liability so if this 175 crores is based on say just a hypothetical
13:31 number of say 100 crores of EBITDA and if they perform 110 crores right for that 10
13:36 crores additional which is there and for the balance take that I need to buy I need to
13:40 basically fair value this 175 which could be higher or which could be low.
13:45 So to that extent whatever is a differential that is coming in that would hit the P&L.
13:48 Otherwise this 175 is a total liability that I need to pay for the balance tranches as
13:52 of 31st March 2023.
13:53 So and this has to be paid within next two financial years including this one?
13:59 Yes.
14:00 So the reason why I am asking is that how many financial years will this this will be
14:05 apportioned into?
14:08 No this 175 will not get apportioned.
14:11 So what would happen is this 175 will get revalued at fair valued at end of the period
14:16 and if this if the liability say goes up to say 180 crores because of the better performance
14:21 only that 5 crores will will be taken as part of the P&L or if it becomes 170 crores then
14:26 5 crores will be a release in the P&L.
14:29 Because my investment would remain the same.
14:31 So in that sense when I am acquiring generally Deneve I have to acquire by next year which
14:37 is 24 25 based on 24 25 in 24 25 I need to do.
14:41 Athena I would be 100 percent by 26.
14:45 So you have complete control of these two companies in the next two financial years
14:51 to be precise.
14:53 Give me a sense of you know internal controls that you have in your company Mr. Tangeerala
14:59 because I saw one of the risk items which where the auditors has raised with respect
15:05 to you know you know comments which respect to you know bogus billing and you know payments
15:13 to ex-employees.
15:14 So what is the kind of internal controls that you have set up post that you know and I think
15:20 the investigation is still pending or is on the verge of completion.
15:24 So where are we on that and how do we how is the company now getting to bring in those
15:29 internal controls.
15:33 Yeah as of now just because you mentioned the investigation is completed but however
15:37 the point is how we strengthened our controls.
15:41 Now look at it we've been in the business for about 35 years.
15:46 This happened in spite of all the controls in spite of all whatever systems we have.
15:52 So now because after this happened we've done the investigation.
15:56 We have identified if there are gaps and then we put in controls in that for these kind
16:02 of ghost employees not happening.
16:05 So that that's unfortunate but however even earlier we had all the controls in spite of
16:11 it you know people can do something.
16:13 So we've identified the root cause put in systems we put in a biometric in every account
16:18 today but even with that it is still possible.
16:22 So what we've done is we've done kind of you know surprise audit happening across all our
16:29 clients.
16:30 Because in spite of having biometrics now everywhere it still could have been possible
16:36 for ghost employees.
16:38 So this is the additional kind of a measure we've taken to do a surprise audit at least
16:44 once a month all our accounts.
16:47 Okay.
16:48 Where are we in addition to the controls what we have.
16:52 Okay.
16:53 Where are we on the whistleblower complaint which you have mentioned in your risk factor?
16:58 Balaji can you take that because both the ghost employee and the whistleblower complaint
17:06 both are concluded.
17:07 So the amounts involved are very immaterial.
17:10 So as we mentioned in the RHP the impact is about 51 lakhs which is with respect to the
17:16 one of the instances at the client side.
17:19 And this amount has been fully provided so we do not have any open whistleblower complaint
17:25 which are there.
17:26 So in 2023 we have not received any whistleblower complaint.
17:29 Even the whistleblower complaint it was not of material.
17:32 No it is not.
17:33 It was about 5 lakhs or something.
17:35 And the other ghost employee was about 50 lakhs over 8 year period.
17:39 Okay.
17:40 Give me a sense of sir you're working with such a huge workforce.
17:43 There are now regulations coming in or the labor courts which are going to come in.
17:49 They have been not been notified but they have been put in public domain.
17:53 How will that impact you going forward?
17:58 Actually that's a blessing for us.
18:00 It will regularize many many things which we are already doing and it will actually
18:04 help us and simplify things.
18:08 It would actually be very helpful.
18:10 For example many of the policies or many of the statutory liabilities all that gets much
18:15 more better and streamlined with this new wage code.
18:19 And today also our paperwork will come down by one tenth.
18:23 So today all your employees have a basic social net like PF or insurance everything in place.
18:30 Right.
18:31 Means anyone who is working for you whether contractual or on your roles permanent roles
18:37 they have these facilities.
18:39 Of course.
18:40 Yes.
18:41 That is by the rule and from the day we have started the business that been there.
18:47 Okay.
18:48 Sir over 4000 point of contacts that you have or buildings where your facilities are there.
18:57 How do you see growth in this market because we have increasingly seeing third service
19:03 participation for facility management or business management increasing.
19:09 What kind of opportunity that you see?
19:11 You've been growing at a fast fast organically 20 percent inorganically another 20 percent
19:17 but as you go forward and increase your play and the geographical reach.
19:25 What is the kind of opportunity that you see and where do you see maximum opportunity coming
19:30 in?
19:33 See the facilities management or the maintenance services business is growing about 15 to 17
19:40 percent is what the industry report says.
19:42 Could be little more than that also.
19:46 Roughly what we do we have a business research team with us.
19:51 Already in this country about 50 million square feet get built every year now.
19:56 I'm talking of a great commercial space.
19:59 So that's our opportunity.
20:00 So we have always grown above what the industry grows and it could be in a range of about
20:07 18 to 20 percent.
20:11 And do you see a hyper competition coming into this segment?
20:20 I don't see hyper competition but there is enough competition.
20:23 And what about contract renegotiations that come in?
20:28 Do you see pressure coming in from clients and especially on how integrated facility
20:36 management IFM segment where the pressure is much more in reducing costs, reducing and
20:43 giving getting more services out?
20:45 Absolutely, you're right.
20:48 You asked me this.
20:50 So what we do is we keep on adding value in terms of innovations, technology, bringing
20:56 down the price and bringing efficiency up.
20:59 This is a process which goes on day in day out every day.
21:02 So just to answer on whatever you said on the customers, I'll give you a real data.
21:08 If you take a fire window, our attrition has been 5 percent.
21:12 That means I retain 95 percent of my clients on a five year window.
21:17 So that means in over term we are delivering what the customer wants.
21:23 And these contracts that you sign with the customers, are they multi-year contracts or
21:27 is it yearly contracts which are renewed every yearly?
21:31 Most of them are yearly.
21:32 Let's say 70 percent are yearly, 30 percent is anywhere between three to five years.
21:38 And these three to five years have escalation clauses every year?
21:42 Absolutely, all these are going to pass.
21:47 Is there any other services that updater can enter into going forward or you're looking
21:52 to enter in going forward?
21:54 I'm asking this because you have a year mark nearly 80 outcomes for inorganic growth.
22:00 Are there new areas which you want to look at and enter?
22:04 We don't have any targets now, but definitely we know where we want to do the inorganic
22:11 there.
22:12 We will be doing the BSS space.
22:15 So only targeting the BFSI basically?
22:20 That is a business support services.
22:22 Where we already have that.
22:25 And you're not looking at new segments, adding new segments in your services?
22:30 No, no, it could be new segments, but in the business support services.
22:35 Okay, gentlemen, it was a pleasure talking to you today.
22:37 Your IPO is opening on September 25th, closing on 27th.
22:41 Price between 280 to 300 rupees, fresh issue 400 and OFS of 240 crores.
22:47 Total IPO size of 640 crores.
22:51 And if I look at the equity, which is an offer, it's nearly 32% of the post-issue equity capital
22:56 of the company.
22:57 Thank you very much for joining us on IPO.
22:59 Thank you so much.
23:01 Thank you for having us.
23:02 Thank you.
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