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Datamatics Global Services Ltd. reported strong Q4 revenues at INR4,127.1mn, up 11.8% QoQ but marginally down 0.8% YoY. The revenue was driven by 8.1% YoY growth in Digital Operations segment. FY24 witnessed 6.2% YoY revenue growth to INR15,499mn. The company reported Q4 EBIT of INR559mn, significantly up 27.8% QoQ but down 25.7% YoY. Reported consolidated Q4 PAT fell to INR525mn (-12.0% YoY). The company added 10 new clients in Q4FY24. It has a robust pipeline of $200mn as on year end.

* Management focus areas: Going forward in FY25E, management shall continue to focus on the Western markets, strengthen capabilities along hyper-scalers, and penetrate deeper into existing accounts. DGSL recently acquired Dextara Digital, a premier provider of Salesforce services, which was in-line with its growth strategy and shall start contributing to topline Q1 onwards. DGSL has also announced acquisition of the balance 23% stake in JVC which shall be rolled forward under Dextara Digital. Management is bullish on the opportunities that AI presents and have incorporated GenAI in its Intelligent Automation suite of products. It has strengthened the management team of Digital Technologies segment and hence see the vertical performing better with high single-digit margins in FY25E.

* Digital Operations segment gaining more share: The company reported that the Digital Operations segment gained more share, with a revenue mix of ~49% compared to 45% in Q4FY24. The segment's revenue stood at INR2,024mn, significantly up 8.1% and 26.2% YoY. Revenue for the Digital Experiences segment stood at INR618mn, accounting for 15% of the revenue mix in Q4FY24, compared to 14.3% in Q4FY23. The Digital Operations segment had higher EBIT margins of 23.5% compared to the Digital Experiences segment's EBIT margins of 11.8%. The Digital Technologies segment reported a revenue of INR1,485mn and an EBIT margin of 0.7% for the quarter. Margins fell abruptly due to heavy investment in AI space, however, high-single digit margins are expected in FY25E.

* Margins to remain stable: Operating margins for the year stood at 13.4%, down 80bps YoY. The decline in margin can be attributed to the premature closure of a project of a top 10 client in FY24. The management expects margins to shrink in Q1 due to annual hikes. Margin improvement levers in Digital Technologies space are identified as gaining premiumisation by offering hyperscaler services and implementation of cost control measures. Management has guided for similar level of margins in FY25E amidst scrapping of low margin business in Digital Experiences segment.

Outlook and Valuation: Slow moving deal pipeline, given the macro-environment challenges and delays in discretionary spending has led to a weak guidance for 7-8% revenue growth for FY25E (organically 4%). DGSL has invested heavily in AI space and AI-first approach shall be the next growth driver. We have downgraded our rating to REDUCE amidst slowdown and arrive at a revised target price of INR571 implying a P/E of 13x on FY26E EPS of INR44.

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