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Datamatics Global Services Ltd. reported muted revenues at INR3,693mn (marginally below our estimates), down 2.0% QoQ and 0.9% YoY. The decline was due to slow decision-making of large deals in Western markets. The revenue was broad based across segments with Digital Operations segment growing 4.9% YoY. The company reported EBIT of INR437mn, significantly down 11.9% QoQ and 12.9% YoY. Reported consolidated PAT fell to INR413mn (-10.0% YoY). The company added 12 new clients in Q3FY24. It has a robust pipeline of $245mn.

* Investment in AI first capabilities: DGSL has integrated Generative AI capabilities into their Intelligent Automation products, consisting of TruBot, TruCap+ and TruBI. They have launched a range of GenAI-powered solutions, such as Enterprise Content Mining, Virtual Assistants, Financial Data Analytics, and Revenue Operations. Management is constantly incorporating AI in their Technologies, Operations, Experiences, and Products businesses. Management believes that contribution from AI shall increase in upcoming years and shall drive significant growth.

* Digital Operations segment gaining more share: The company reported that the Digital Operations segment gained more share, with a revenue mix of ~43% compared to 41% in Q3FY23. The segment's revenue stood at INR1,604mnn, down 2.6% sequentially but up 4.9% YoY. Revenue for the Digital Experiences segment stood at INR575mn, accounting for 15.6% of the revenue mix in Q3FY24, compared to 16.4% in Q3FY23. The premature abrupt closure of a project in this segment in earlier quarter has a continued impact on its margins. The Digital Operations segment had higher EBIT margins of 16.5% compared to the Digital Experiences segment's reported EBIT margin of 15.4%. The Digital Technologies segment reported a revenue of INR1,514mn and an EBIT margin of 5.5% for the quarter. Management expects its margins in this segment to be in the range of 7-8% for FY25E.

* Margin improvement visibility: Operating margins for Q3FY24 stood at 11.8%, down 133bps QoQ and 164bps YoY. The decline in margin can be attributed to the premature closure of a project of a top 10 client. The management expects margins to improve and remain healthy going forward due to high level of automation. The management is undertaking projects with high margins in US and India. Focus shall remain on productivity and margin expansion rather than price hikes

* Outlook and Valuation: Robust pipeline, push towards AI first and organizational reshuffling are identified as the growth drivers. However, given the macro-environment challenge and delays in discretionary spending, it has guided for 4.5-5% revenue growth for FY24E. Management expects Q4 to be the strongest (11-12% growth) due to cyclicality and is confident on seeing ramp ups from the client who prematurely closed the deal. We expect Revenue/EBIT/PAT CAGR of 14.4%/19.5%/19.2% resp. over FY23-FY26E. We maintain ADD to arrive at a target price of INR760 implying a P/E of 14x on FY26E EPS of INR54.

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