Operator: Ladies and gentlemen, please stay connected. The call will begin shortly. Thank you. Ladies and gentlemen, good day and welcome to Smartworks Coworking Spaces Limited Q2 FY27 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Diwakar from EY. Thank you, and over to you, sir.
Diwakar Pingle: Thank you, Huda. Good afternoon to all of you. Welcome to the Q2 and H1 FY27 earnings call of Smartworks Coworking Spaces Limited. To take us through the results today and answer your questions, we have the top management with us, represented by Nitish Bhargava, Managing Director, Harsh Binani, Executive Director, Sahil Jain, Chief Financial Officer, Pratik Agarwal, Chief Business Officer, and Anirudh Tapuriah, Chief of Strategy and Investor Relations. We will start with opening remarks from management, post which we will open the floor for Q&A session. Before we proceed, I would like to remind you that certain statements made during this call may be forward-looking in nature. These statements are subject to risks and uncertainties, which are outlined in the presentation and that you can find on the website. That said, I would now like to hand over the call to Nitish Bhargava for his opening remarks.
Diwakar Pingle: Over to you, Nitish.
Nitish Bhargava: Thank you. Good afternoon, everyone, and thank you for joining us. We are at the halfway mark of FY27, and we are ahead of the plan that we shared with you in April. Let me start with the quarter in brief. Revenue from operations stood at INR 591 crore, up 39% year on year and 8% quarter on quarter, our sixth consecutive quarter of sequential growth since listing. The normalized EBITDA stood at INR 117 crore, up 68% at a margin of 19.8%, 340 basis points higher than a year ago. Our normalized PAT stood at INR 43 crore, up 136%. Revenue is growing every quarter. Profitability is growing with it. The buildings we need are secured with high revenue visibility, as our contracted revenue stands at over INR 5,800 crore. We are increasing our revenue guidance to 33% to 35% from our earlier given guidance of 28% to 30%.
Nitish Bhargava: Let me walk you through the market, our supply, our client, because together they explain both the quarter and the investment that we are making. India leads a record 66.4 million square foot of office space in the first nine months of 2026, up 8% year on year, according to CBRE. Even though geopolitical tensions and uncertainties on AI, occupier decision and deal closures stay broadly intact. Uncertainty is exactly why flex is winning. When companies are unsure how fast they will grow, they do not want to lock in long leases and large upfront spending. Flex gives them ready-to-use space that they can scale up and down. This is why flexible space operators took 24% of all office leasing in July to September quarter. GCCs and AI are adding to the demand, not reducing it.
Nitish Bhargava: Global capability centres took a record 28 million square foot in nine months of this year, 42% of all leasing activities. Several clients who expanded with us this quarter are building their AI teams in our campuses. In short, AI changes what happens inside an office. It does not change the need for one. In a market like this, the hardest part of our business is not finding clients. It is finding the right buildings early. Our platform now stands at 17.5 million square foot across 71 centers, of which 10.9 million square foot across 58 centers is already operational. We added almost a million square foot of operational space in the first half. We have 4.3 million square foot of space under fit-out or awaiting handover within this year, against the 1.6 to 2.1 million we need to go live by March.
Nitish Bhargava: Two of our major campuses, Eastside in Pune and Eastbridge in Bombay, will go live in the second half of this year. Both campuses open with healthy pre-commitments, and both will contribute meaningfully to the FY28 revenue. Everything we need for FY27 is secured. Our supply for FY28 is now largely in hand, with work for FY29 underway. In Singapore, we now run four centers with over 1,600 seats at around 86% pre-committed occupancy. Large supplies attract large clients. Large clients sign large deals, and large deals come with long tenure. This makes our revenue sticky and durable. Look at who works in our campuses today. Some of the world's largest GCCs, multinationals from the US, Europe, Japan, Fortune 500, and Forbes Global 2000 companies, and India's leading conglomerates. Large enterprises now bring us 91% of our rental revenue.
Nitish Bhargava: For instance, 35-plus clients now have more than 1,000 seats with us. Our 1,000-plus seat cohort contributes to more than 41% of our rental revenue, up from 35% a year ago. 70-plus clients are with us in more than one city, contributing to our multi-city revenue, which stands at 35% of our total revenue. GCCs are up by 22% of our rental revenue, and our SmartVantage program now gives them one partner for workspace, hiring, legal, tax, compliance, and as they set up and scale in India, they will need it all. Our base is also broader than ever. IT/ITeS is down to about 36% of the rental revenue from about 40% a year ago. Over 75% of the revenue that we added over the last year came from outside IT and ITeS companies.
Nitish Bhargava: Our top 10 clients are now about 24% of our rental revenue, up from about 20% a year ago. This is because our largest clients are taking more seats and following us to more cities. The risk stays contained. All of this shows up in our visibility. Contracted rental revenues now stand at INR 5,800 crore, up from INR 5,400 crore in the last quarter. Client lock-ins cover our rent commitments to landlords about two times over, and there is no asset liability mismatch through FY27. Let me bring it together. Revenue has grown sequentially for six straight quarters. Supply that we need is secured, and revenue to fill it is increasingly getting contracted. In H1, revenue grew 41% year on year, and normalized EBITDA stood at 19.7%. On the back of this, we are raising our FY27 revenue growth guidance to 33% to 35% from 28% to 30%.
Nitish Bhargava: We are keeping our normalized EBITDA margin guidance at 19% to 20%, trending towards the upper end of that band already. We continue to expect more than 12.5 to 13 million square foot of operational space by March of 2027. We are building where India will look to work this decade. With that, I hand it over to Harsh for financial and operational details.
Harsh Binani: Thank you, Nitish, and good afternoon. I will take you through three things: how we are tracking against what we promised, the quarter itself, and the investment we are making for future growth. From this quarter, we publish a say-do scorecard with every set of results, so you can check us against our guidance in one place. To begin with, revenue growth, we guided 28% to 30%. H1 revenue grew by 41%, and we have therefore now raised our guidance to 31% to 35%. Margin, we guided 19% to 20%. H1 came in at 19.7%. We are on track and trending towards the upper band. This is in spite of the heavy CapEx cycle and the growth. Footprint, we guided 12.5 to 13 million square foot by March.
Harsh Binani: We are already at close to 11 million square foot operational now, with another 2.1 million under fit-out and another 2.3 million awaiting handover. CapEx, we guided INR 550 to 600 crore. We have deployed about INR 307 crore in the H1. With the H2 weighted towards Eastside and Eastbridge, we are investing in growth. Now, if we look at the quarter, our revenue from operations was at INR 591 crore, which is up 39% year on year and 8% quarter on quarter. It is our sixth consecutive quarter of sequential growth since listing. Normalized EBITDA was INR 117 crore, up 68% year on year, at a margin of 19.8%, up 340 basis points. Our normalized PAT was INR 43 crore, up 136%, and reported PAT was INR 26 crore.
Harsh Binani: Of course, our profit is growing much faster than revenue because our centers are maturing and completing payback, and our cost at both center and corporate level are growing slower than revenue. Energy efficiency initiatives and several cost excellence initiatives across our campuses are adding further savings. Each new batch of our campuses now lands on a larger mature base. So at our scale, new campuses are not margin dilutive. Now, let me talk about the investment we are making. This is one of our heaviest CapEx cycle, and it is a deliberate choice. We are investing today in supply that is scarce to serve demand that is not. In the first 6 months, we invested INR 307 crore towards CapEx. Coming to cash conversion, our normalized operating cash flow was INR 107 crore in the quarter and INR 202 crore for H1. OCF to EBITDA was 0.9 times.
Harsh Binani: The reason is quite simple. Securing a building, we pay the landlord a security deposit upfront, months before the building starts generating any revenue. On the campuses that are already operational, our cash conversion is comfortably above one time, strongly indicating our negative working capital model. As the new business, new campuses go live and start billing, client deposits and rentals come in, and our reported cash conversion moves back towards its usual level. Our working capital model has not changed. Our debtor days remain best in class at 7 days, courtesy the large enterprises we serve. As stated earlier, our free cash flow for the half was negative at about INR 104 crore, largely because our CapEx is running ahead of the cash generation from new centers while they ramp up.
Harsh Binani: Our net debt was about INR 83 crore, and our cost of borrowing after the recent credit rating upgrade continues to remain below 8.5%. Our free cash flow will turn positive as our mature base approaches 13 million square foot, which should happen down the line in the next few quarters. Moving to our occupancy, overall occupancy was about 81%, at the lower end of our 80% to 85% band, as during the quarter, we added about 11,500 seats of capacity, which increased the base meaningfully. Our committed occupancy is at about 86% overall. Our mature centers, about 9.7 million square foot, are 88% occupied and 91% committed. And our new campuses are already 48% committed. As the H2 campuses open, you may expect an overall occupancy dip because the denominator will see a significant capacity addition. However, this will go back above the band very quickly.
Harsh Binani: Our annualized normalized ROCE was 21.6%, which is a massive jump of 800 basis points year on year. We have invested about INR 200 crore in CapEx and security deposits for centers that are not even open, about a fifth of our capital employed. Largest growth, heaviest CapEx cycle yet, our ROCE continues not to dilute. That capital sits in the denominator, but has not yet started to earn for us. As these centers mature, we expect a meaningful expansion in ROCE. Before we go to questions, let me tell you how the next two quarters will look like, so there are no surprises. In H2, we open the largest block of capacity in our history, about 45,000 seats, most of it in Eastside and Eastbridge. Blended occupancy may temporarily dip below the 80% mark only till the time these two mega campuses ramp back.
Harsh Binani: They already have very good pre-sell commitments. Our reported cash conversion will continue to remain below one as we pay the deposits to block new supply. However, on operational centers, it will continue remaining above one. At the same time, our rental revenue growth will continue accelerating as the campuses bill. Our other operating revenue normalizes also from Q2, and it will continue to grow with more people and more companies coming on board. To finally close, our FY27 revenue growth guidance goes up to 33% to 35%. Margin guidance stays at the upper end of 20%. We are expecting 13 million square foot operational by March end, and to keep adding 2.5 to 3 million square foot every year, we will continue to fund it from within the business and debt. Six quarters listed, six quarters of sequential growth.
Harsh Binani: We are not building Smartworks for the next quarter. We are building it for the next decade. With that, we are very happy to take your questions.
Operator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Karan Khanna from Ambit Capital. Please go ahead.
Karan Khanna: Yeah. Hi, thanks, and congrats, Nitish and Harsh, on a solid quarter. Firstly, on Eastside and Eastbridge, Harsh, you briefly spoke about it, but can you talk a bit about the pre-leasing situation here? From which sectors is demand most for these centers, and by when do you expect them to reach a stabilized occupancy in terms of percentage?
Harsh Binani: Both Eastside and Eastbridge are still under construction. I think Eastside, as a property, will come in quicker than Eastbridge. Eastbridge will yet to receive the OC for the building and will only start construction once the OC is there. With respect to the pre-fill or the kind of demand that we are already seeing, about 35% pre-fill is already visible. You have a significant portion of that is actually coming from our existing clients expanding with us in these locations. A lot of it is through mainly BFSI, manufacturing, logistic companies who are taking up spaces in these locations as we speak, which are our existing customers expanding. But we are also seeing some uptake from IT and ITeS also in both these properties.
Harsh Binani: I would like to repeat myself and say that both these properties are coming up live in H2, but for Eastbridge, the OC is also not coming yet. So, once the OC comes in, we build it out in the next three to four months. By the time the revenue starts hitting it might be the end of or latter half of Q4 of the year.
Karan Khanna: Sure. Secondly, on the FY27 revenue guidance of 33% to 35%, this implies H2 FY27 revenue of about INR 1,250 to INR 1,280 crore. So, that is about 26% to 30% growth year on year and roughly a INR 630, INR 640 crore quarterly run rate against INR 600 odd crore that you had seen in Q2. So, how much of the H2 increase do you expect from lease rentals, and how much of it is from other operating revenue? As a follow-up on the EBITDA margin guidance, given that you have already delivered 20% in H1 and have raised the revenue growth guidance to 33% to 35%, what levers do you have in place to potentially surpass this EBITDA margin number?
Nitish Bhargava: So, for us, right now, the existing centers, if you look at our mature centers, they are already at about 80, already about 91% committed occupancy. So, whatever uptake in revenue that you see will only come in from these centers. If you look at centers under construction, there is always a lag before it gets and starts hitting us in terms of revenue. We have more than 3 million square feet under construction as we speak, or just getting into construction. You will not see a significant amount of that. The reason that we have put the guidance at that 35% is because a lot of that might only come in the latter half of the financial year and might hit our books by February and March, because that is the build-out time that it will take for us to get to those centers.
Nitish Bhargava: You will see revenue from these rentals to gradually increase as and when we build in our supply, because our existing supply, which is mature, is already at 91%, and there is not a significant uptake that we can take from that. With the new supply kicking in, you will see Q4 and the first quarter of next year getting most of the uptake from the new supply coming in. You will see other operating revenue. For us, other operating revenue is not just restricted to one-time revenue. It is also revenues coming in from other services that we do on a recurring basis in the buildings, whether it is our electricity charges, car parking, meeting room bookings.
Nitish Bhargava: All of those systems start generating revenue before the rental revenue kicks in completely, because people usually start coming into the centers, occupying the centers, and then in 10 to 15 days, 20 days after that is when the rental revenue start kicking in from the customers. So, typically, you will see these other operating revenues based on the increase in VAS revenues, increase in our revenues from other new verticals, whether it is Vantage or FaaS, also contributing towards the revenue guidance that we have seen. But revenues coming from these rentals, a significant jump of that, you will see towards the end of next quarter. And most of it will come towards the start of the first quarter of next year, because three, four months is the build-out time for most of these properties.
Karan Khanna: Sure. This is helpful.
Harsh Binani: To add to Nitish's point, Karan, on the margin level, we should appreciate that in the last six quarters, we have had a significant margin uptick. Largely driven by operating leverage as our mature campuses portfolio crossed that 12-month hurdle. So, you had margin grow by more than 340 pips, from 16.4% to close to 19.8% now. In the background, in the last six quarters, you have also seen rapid capacity addition, the highest in the industry. We continue growing the fastest amongst the larger flexible workspace pool. Our margins have not diluted in spite of the heavy CapEx as well as the growth that you are seeing. We do expect that the margins will continue to remain at the upper end for the remainder of the year.
Harsh Binani: As you start to see 13 million square foot maturing, you will now start to see a lot of free cash flow also get generated. The other levers of our margin, whether it is the other income as well as the pricing opportunities we keep getting, which is the 5% to 6% escalation which happens every year, that also in entirety will also start to help us improve. At this stage, we are very happy with the fact that in spite of the rapid growth and the heavy CapEx, our margins have actually increased meaningfully in the last six quarters and have now stabilized at the upper end, in spite of the new capacity addition you will see in the next several quarters.
Karan Khanna: Yeah. Great. This is helpful. Thanks, team. All the best.
Nitish Bhargava: Thank you.
Harsh Binani: Thank you.
Operator: Thank you. A reminder to all participants, anyone who wishes to ask a question may press star and one on their touch-tone telephone. The next question is from the line of Saurabh from JM Financial. Please proceed.
[Analyst] (JM Financial): Yeah. Hi, good afternoon. Congrats on a good set of numbers. My first question is on occupancy. Some part of that you have already alluded to in your opening remarks. I just wanted to get a sense, from a slightly longer-term perspective. We have been adding capacities at a rapid pace. Added about 2.5 million square feet over the last six months, and during the same period, close to 2 million square feet is leased, right? Given the fact that we also have 1.7 million square feet coming up over the next two quarters. Where do you see this occupancy trajectory of 80%, 81%, reaching maybe 84%, 85%? Can you share any timeline for that, or do you believe this occupancy range of 81% ballpark will sustain for, let's say, foreseeable future?
Harsh Binani: No, certainly. On occupancy, you have seen we have added significantly new capacity, and our mature campuses is the key marker because there you will see our occupancy is always trended towards 90%, and it is taking us significantly same time in spite of our campuses growing meaningfully bigger in size. In our earnings presentation also we have mentioned, right, that our center sizes have gone up by more than two to three times, but the time to fill them and get them to about 90% continues to remain below 18 months. That is largely happening because our number of 1,000-plus seat deals have meaningfully gone up from 12%, like four, five years back, to more than 41% now. To that extent, you can expect that our mature campuses will continue breaking even within a year and reaching that threshold of 88% to 90% within 18 months.
Harsh Binani: As our maturity stabilizes, which we expect in the next four quarters, you will continue to see the overall blended occupancy number trending more towards the 84% to 85% that you mentioned. We would not worry about the blended dips because that is largely more of a mathematical formula. Whenever a big campus opens, for example, Eastside, Eastbridge, you are adding more than 40,000 seats in your denominator, but you are ramping them up gradually, and that too very quickly. To that extent, our guidance continues to remain 88% to 90% on our mature campuses. On a blended wise, we will, of course, continue to report the actual numbers, but do bear in mind the mathematical part also of the equation.
Nitish Bhargava: Just to add to that, with respect to how Smartworks' model is, we do not do back-to-back deals. That is why you will see in our revenues, one client moving out of the ecosystem does not really impact our revenues also significantly, because we do not have occupancy risks coming from one customer occupying our entire building. Because we do not do back-to-back deals, and the time to ramp up centers usually is there, but despite us taking these massive centers, the pre-sell that we have is helping us give that guidance that we will be able to sort of beat the numbers that we had projected. Also, as Harsh mentioned, the relevant number to look at here is the occupancy coming in from our mature centers. Mature centers continue to be very, very stable, with 88% from the entire mature portfolio and committed of over 91%.
Nitish Bhargava: It means that the remaining 3% is already signed and might be under construction and will hit over the next 30 to 60 days itself. The last thing is, even if you look at our committed occupancy for our current base, it is already at 86%. It means that 80% is our occupancy, but this remaining 6% is also under construction. So, the new capacity will, yes, drag down the overall occupancy, but the more relevant data to see is the occupancy of our mature centers, as well as the occupancy or the committed occupancy of the overall centers, which gives you an idea of how much more revenue is going to hit.
[Analyst] (JM Financial): Thanks for the lovely answer. My second question is on the CapEx per square feet specific number, specifically for the grade A supply that is going to come up soon. Is the initial CapEx per square feet number close to INR 13,000 per square feet is holding up, or are you anticipating any increase in that?
Nitish Bhargava: INR 1,350 to INR 1,400 is what we used to be spending. Obviously, there is some sort of an increase due to inflation, which we had projected also about 4% to 4.5% year on year. With the numbers that we have reported, we are still trading around that. One of the reasons for us to do that is also because of the significant newer addition that we are doing. We added 1.5 million square foot last year. This year, we are adding 3 million. Our ability to negotiate at this scale is even higher. We are continuing to be closer to that INR 1,400 plus the 4%, 4.5% to 5% inflation that we had anyways factored in.
[Analyst] (JM Financial): Those were my questions.
Harsh Binani: Just to also give a flavor of the CapEx cycle, we have also mentioned in our earnings presentation that about three years back, we used to add a million square foot a year. Every year, we are continuing to add more capacity than what we have ever done in our history. For example, 3 million additions this year will entail a CapEx that will be twice the CapEx that we have incurred in the last full year. In spite of that, you will see that our balance sheet metrics continue to hold very well, because the mature campuses have now attained a certain size and scale. They are throwing a lot of cash, and the return on capital there is very meaningful. Some of them have also finished two cycles now.
Harsh Binani: The new campuses which are coming in, we are investing ahead of time, both in terms of security deposit as well as the CapEx build-out, because we are continuing to see very strong demand momentum. To that extent, the CapEx for H1 was INR 307 crore, and a meaningful part of that is sitting in the newer campuses.
Nitish Bhargava: Which has not started generating revenue.
Harsh Binani: Which has not started generating revenue. In fact, to the extent that 20% of our CapEx is on campuses where no revenue has been started yet.
[Analyst] (JM Financial): Thanks, sir. Thanks for the lovely answer. All the best.
Operator: Thank you. A reminder to all participants, anyone who wishes to ask a question, may press star and one on their touch-tone telephone. The next question is from the line of Jay Kant Beria from IIFL Capital. Please proceed.
Jay Kant Beria: Yeah. Hi. Thanks for the opportunity. I just wanted to get some sense on the strong growth that we are seeing in other operating revenues. That has gone up 125% this quarter. Can you highlight what is driving this strong growth, and what is a more sustainable number to work with?
Nitish Bhargava: Sure. As we mentioned earlier, our rental revenues coming in from our existing centers is limited because we are already at a committed occupancy of about 91%. So there is less space for us to sell. In our other operating revenues, there are revenues which we get from whether it is Value-Added Services that we provide in the building, other ancillary services that we provide in the building. With the footprint overall increasing from 9 million to 10.5 million, there are more areas of offering, whether it is car parking that is offered, additional electricity bills that goes out, meeting rooms, conference rooms, food services that are there in the building. All of it is contributing cumulatively towards the other operating revenue.
Nitish Bhargava: Other operating revenue for us is not just one-time transactions, it is also recurring transactions, which, because of our unique model of running the entire campus, a lot of consumption that happens within the campus happens on a regular basis. All of them fall within the other operating revenue. Currently, we had two or three new verticals that we started. The growth seems a little higher of about 125% because the base was very small. We launched our SmartVantage program, our VAS program, as well as our FaaS program. All cumulatively is contributing towards the growth. All these verticals are growing from the smaller base that they were at and contributing. All of this, by the way, did not exist in H1 of last year. So H1 of last year was pure and pure only additional ancillary revenues from the buildings.
Nitish Bhargava: Now, all these three verticals, whether it is Vantage, FaaS, Fit-out-as-a-Service, or as well as Value-Added Services, all of it is getting added. That is why you will see that uptake. If you look at that number, we have gone from about INR 70 crore of pure revenue from ancillary services to INR 170 crore for H1 of this year. But that is also with the base of real estate increasing from 9.1 million square foot to 10.9 million square foot. So 20% of that INR 70 crore would have anyways come in from the ancillary services. The other verticals, whether it is FaaS, or the Vantage program, is contributing to the remaining INR 50 crore, INR 60 crore that is getting generated in the first half.
Jay Kant Beria: Okay. As our footprint grows, will it be fair to assume that the other operating revenue will continue to lead the rental revenues?
Nitish Bhargava: Absolutely. We should consider the same proportion of growth on the other ancillary revenue also with the footprint growth. So if our footprint grows by 20%, other operating revenue minimum should grow by 20%, because a lot of it is ancillary services which are table stakes for any customers to occupy the building.
Jay Kant Beria: Sure, that's helpful. Thank you.
Operator: Thank you. The next question is from the line of Devang Patel from Sameeksha Capital. Please go ahead.
Devang Patel: Hi. Your revenue per desk or revenue per square feet is also seeing a very good growth year on year. Could you give a comment on what is driving that other than your normal annual escalations?
Nitish Bhargava: No, absolutely. I think a more important marker for us, not only the revenue per square foot, but it is also a cost per square foot. That is where you will see Smartworks really standing out because both our CapEx incurred on the building as well as because you are managing the entire building, your building operations cost, energy excellence, several other initiatives are ensured that we are able to fully leverage our economies of scale and make sure that our cost per seat is the lowest. That cost per seat being the lowest allows us to sell our rental at value. You will also notice that all the large campuses that we have taken, the rental terms that we have compared to where the market is, at significant preference.
Nitish Bhargava: A combination of the fact that our cost per seat is continuing to get lower and our ability as a brand now to continue delivering at value, the price that we are charging to our customer is driving the rental revenue growth. You have also seen some of our newer campuses happening in higher rental markets, so that also does contribute because of late, we have had a lot of expansion in the West, Gurgaon, and South markets. A combination of annual escalation, better cost savings at a ground level, as well as better realization is driving all of these levers together.
Nitish Bhargava: Our vision continues to remain to deliver value to our customers and being the most value player who delivers meaningful cost savings to them, because what you are trading there is very long-term tenure, which is very sticky, rather than optimizing for short-term EBITDA or margin gains, even when you can charge slightly more.
Devang Patel: Your rental escalations would continue to remain in 5% to 6%. All the remaining increase in average rental is coming from the mix change. Would that be the right way to see it?
Nitish Bhargava: It is a mix. Some of it is, yes, coming from the newer stages. The newer deals that we are doing is at a higher rental base, with much larger centers with more amenities coming in, so we are able to demand better pricing. It is also, you would have seen in our last couple of quarters that there were some voluntary churn that we did, and that voluntary churn allowed us to reprice some of our buildings and get it, especially deals which were signed during the COVID period. Those deals were renegotiated at today's rental markets. That also you will see continue happening as and when leases get expired. Because we have long-term leases, it cannot happen immediately in the next quarter or the next year itself, but it will happen over a year or two. That uptake you have already started seeing on the realization.
Nitish Bhargava: New centers are obviously contributing more because we are able to charge more, but even the older centers, most of it we are able to reprice whenever we are able to churn out some of the lower paying clients.
Devang Patel: You mentioned some of the new centers on the western side have earned you a higher rental. Is the CapEx also accordingly higher on these centers?
Nitish Bhargava: No, we are able to manage the CapEx to be around the same number post-inflation because of the volume of business that we are taking. Had this volume not come in and we would have still been continued to grow at 1.5 million square foot, we would have not been able to get that. Probably the prices would have gone up, but because of our centers, sizes of centers going up, we are able to make sure that we are further negotiating at scale and getting our costs down on some of the items which would have ideally gone up because of these mega centers. We are not seeing that on basis of higher spend, but we are seeing that basis on higher amenities provided in these large campuses.
Devang Patel: Of the 300-odd crore on CapEx in the H1 or 600 that you may do for the full year, could you give a ballpark of how much of that would be maintenance CapEx?
Nitish Bhargava: Approximately, 4.5 million square foot of Smartworks falls under more than three years of expiry. If you look at it, about 20% maintenance CapEx comes in for about 4.5 million square foot of space. If you look at that, about closer to, if I just have to do a calculation, how much would it be? Anirudh, do you want to just quickly go one of the-
Anirudh Tapuriah: Hey, hi, Anirudh this side. Thanks, Devang, for your question. If you look at our slide 14 of the deck as well, what we generally have is around 12% to 15% of our gross block every year goes towards maintenance CapEx. That is a fair estimate from a ballpark perspective, which we can continue expecting to be-
Nitish Bhargava: About INR 95 to 100 crore will go towards maintenance CapEx this year.
Devang Patel: Okay. Moving on, you mentioned two large CapEx is coming up in H2, which may keep a cap on margins. These are large campuses, so how long before they reach break-even occupancy, and will that impact on margins continue for H1 or H2 of next year as well?
Nitish Bhargava: We have, in fact, in our presentation earnings deck, on page 12 clarified the journey that we typically see in any campus of ours. What you will notice is two new things which have happened in the last 12 months or so. One is that we are taking campuses which are much larger than what it used to be earlier, yet our time to fill them and get them to about 90% occupancy continues to remain same. Secondly, our larger campuses are all operating at very healthy occupancy levels of above 90%.
Nitish Bhargava: In spite of the rapid growth, bigger sizes of the center, our margins haven't gone down because we are able to fill them up very quickly, while at the same time, your occupancy for your larger campuses, courtesy the long tenures we have with our customers, that continues to throw a lot of cash and is very profitable. To that extent, in spite of the rapid growth, margin not diluting is a testimony of the strength of the franchise that we've built, and a lot of the cost excellence initiatives and the preferred rental terms which we continue to enjoy. I think just to add to that, the 10 million square foot which is going to get completely mature, or is almost completely mature this year, is contributing 300, 400 basis points more than the EBITDA margins.
Nitish Bhargava: Whatever the 3 million initial drag is going to be, is going to get compensated by the older 10 million square foot now that the base effect has kicked in, as we had said in our earlier calls, that the 10 million is going to. The 300, 400 basis points additional that we get from the 10 million mature portfolio will make sure that the 3 million drag is not significantly reducing our margins. Despite us increasing our guidance, we are making sure that our margin stays at the numbers that we had committed.
Anirudh Tapuriah: Devang, just to add on slide 15, you will actually see we have also given a journey as well, that in cycle 1, what happened over fiscal year 2023 to 2025, what happened in the second cycle of 2026, and how we are well-positioned for the third cycle in fiscal year 2027 as well.
Devang Patel: Okay. Just a last part to that. So 35% you mentioned is pre-filled. How much time would it take you to reach break-even occupancy, considering these are larger campuses? Do you think it might take a bit longer than you normally take?
Nitish Bhargava: No, typically with the kind of pre-fill that we are seeing, we are saying that between 11 to 12 months, we should be getting to that break-even, which has been the strategy with some of our other buildings also. Because we do not do back-to-back deals, which is what most of the industry does, there is a little bit of a ramp-up period. But we are fairly, with the kind of demand that we are getting and the pre-fill that we have gotten, between 10 to 12 months to get to that break-even portion is fairly visible. The visibility is there.
Devang Patel: Thanks. That is all from my side.
Operator: Thank you. The next question is from the line of Riddhansh Chandak from Unifi AMC. Please proceed.
Riddhansh Chandak: Hey, hi. Congratulations on a great quarter. Thanks for the opportunity. In fact, one question. I wanted to get your sense on understanding, at what size per client do you see your customers move out of a flex operator setup and into owning their own assets and running the show on their own? In terms of seats, if you call.
Nitish Bhargava: I do not think, Devang, there is a certain size at which it makes a difference or it makes sense for the customer to make their own space. I think it is the tenure. If a customer is looking at a tenure of more than six to seven years of committing to a particular space, then at any given point of size above 400, 500 seats, it will make sense for them to have their own space. But anyone who does not have visibility towards seven years, and this can be both, not just scaling up, but scaling up and down and between cities, a flex option is always more economical because you are able to derive the large-scale efficiencies that we give. Also, please look at the price point at which Smartworks is selling.
Nitish Bhargava: We sell a seat on an average at about INR 8,200 per seat, which translates to almost INR 300 a day, which is less than a cup of coffee. At the price point at which Smartworks is able to cater to its customer, unless and until the customer is looking at at least a seven to eight-year lock-in period and at least 400 to 500 seats plus, it will never make economic Smartworks proposition is going to be significantly more value accretive for them.
Harsh Binani: In fact, to Mr. Vishal's point, we have done the math, Vedansh, and what we have generally seen is as long as our campuses are 2 times or 3 times bigger than your own need, Smartworks, just because of its cost leadership and size of the campus, we will always end up being more economical and more cost-effective. In fact, that is the reason why a lot of our tenures are now continuing to trend more upwards, and you are becoming a more substitute for your permanent office rather than it being more like an overflow.
Riddhansh Chandak: Got it. Thanks. Thanks for answering that. Wish you guys the best of luck. Happy Diwali in advance.
Harsh Binani: Thank you.
Operator: Thank you. The next question is from the line of Vikrant Kashyap from Asian Markets Securities. Please go ahead.
Vikrant Kashyap: Hi, good afternoon, and congratulations on a very good strong set of numbers. Two questions. First, on your opportunity base, just start enterprise and GCCs. Now enterprise clients contribute over 91% of revenue, GCC contributes about 22%. My question is, what is the current opportunity pipeline from GCC and what growth contributions can this segment drive over next two, three years?
Nitish Bhargava: Currently, GCCs contribute almost about 22% of our revenue base. But this is starting from a base which was less than, was in single digits probably last year. So, the base was much smaller. If you look at effective GCC growth, almost 35% to 40% of our growth is coming from large GCC clients who are entering into our ecosystem. We continue to project 35% to 40% of our incremental growth coming in from GCCs itself. But we are also seeing a significant uptake coming in from BFSI, manufacturing, and some of the large Indian conglomerates who are also looking at Flex and Smartworks as a better alternative than having their own spaces. While GCCs is going to contribute about 35% to 40% of our new rental revenue, other avenues are also contributing meaningfully.
Harsh Binani: In fact, in slide 27, as well as our shareholder letter, we have elaborated the type of customer relationships, the type of tenures, and you will be pleased to know that not only is 91% of our revenue coming from large enterprises, but we have more than 35 large client relationships which are more than 1,000-plus seats. While we will be very keen to continue servicing GCC, but the way the platform has shaped up across India, we are reasonably agnostic, right, to either any sector or the country of origin. We are, in fact, seeing a lot of conversions now of conventional office space also exploring and looking at contracts such as ours.
Vikrant Kashyap: Just a quick question on that. Are you seeing if existing GCCs are taking more seats in your center or GCC centers, or are you getting more of new GCC clients in these?
Nitish Bhargava: Well, it is a mix of both. It is very difficult to sort of say which is there because GCC take-ups are of a significant scale. Essentially, it is actually a mix of new GCCs as well as some of the older GCCs. As Harsh mentioned, 35% revenue coming from our existing customers. A lot of those are GCCs who are expanding with us. So, it is difficult to sort of point out how much is coming from new GCCs entering into India or GCCs expanding, but I think if I have to give a number, both of them would be contributing 50% to 50% to our year on year growth.
Vikrant Kashyap: Very much understood.
Nitish Bhargava: Sorry?
Harsh Binani: Appreciate it.
Nitish Bhargava: Oh, thank you.
Operator: Thank you.
Harsh Binani: Thank you.
Operator: The next question is from the line of Yash from DAM Capital. Please proceed.
[Analyst] (DAM Capital): Hi, team. Good afternoon. Thank you for taking my question. Just picking up from where my colleague left, I understand that the demand for space remains robust within your portfolio as of now. Since most IPCs would maybe point to demand over the next 12 to 18 months, and since supply is constrained, please help me understand how you plan for space additions over a longer timeframe, say, 3 years.
Nitish Bhargava: If you look at our supply strategy, and we have called out in the presentation also, if you look at slide number 26, we've essentially called out how and where is the space expansion happening and what is the percentage. Our supply strategy has been very simple. We've gone ahead and not only blocked supply for this year, but the supply for the next entire year is completely blocked out. In fact, we are now taking supply for the year after. We've realized with supply being one of the biggest constraints in a market where demand is higher than the available supply, and that's the reason why rentals are also increasing, we are able to secure the supply at preferred rates, significantly lower, because of the volume that we are committing. We have secured the supply at least through the next 18 to 24 months.
Nitish Bhargava: Whatever supply we are taking now is for our growth beyond that 24 months. In terms of supply strategy, we don't see any restrictions coming in. There are certain challenges which might come in where certain properties can get delayed, maybe by a quarter or 2, because a lot of these properties might be under construction, or there might be an existing tenant who's occupying the space and vacating that space might get a little delayed. But we have factored that in, and you might see a little bit change in the occupancies in our subsequent quarters. But it is not going to financially impact significantly because of the way that we have positioned that space take-up over the next 6 to 7 quarters. Hopefully, that answers your question, yes, sir.
[Analyst] (DAM Capital): That does, thank you. Also, given the uncertainty around demand space is helping drive the demand for office spaces towards flexible workspaces. Would that imply that should the situation improve, demand for flex might loosen?
Harsh Binani: Look, we have had several phases where this is now every uncertainty demand leads to more permanence to the space. This is not the first time we are seeing this play out. During COVID, the entire uncertainty was around work from home. You saw the demand boomed. Then you transitioned and moved towards the global slowdown. In spite of the slowdown, Ukraine crisis, oil prices going up, it went up even more. Recently, in the last 6 to 12 months, there has been an entire scare around AI as well as the geopolitical uncertainty, particularly in West Asia. What have you seen? Office demand continuing to go through the roof and flexible workspaces doing even better. I think the more relevant question in our mind is, when will the share of flex space, which is at about 14% to 15% now, double from here?
Harsh Binani: When, apart from the doubling, you will also see the base of office space going up from the current 1 billion square foot to 2 billion. We will not be too worried about any of this short-term trigger. In fact, the more uncertainty, the more benefit that we get, and you will continue to see very strong growth trajectory. That is what we can say, right, from the demand outlook we are seeing from our customers.
Nitish Bhargava: I think, just to add to that, it is not only because of the uncertainty that people are committing. People are coming and committing. Most of our larger enterprises are committing to long tenures. They are committing to 40, 50 months of tenures with us. They are committing to multi-city deals with us. It means it is a habit shift. It is basically, a lot of these enterprises are talking to us and saying that, "I do not want the headache of managing my offices across different cities in India, dealing with different designers, dealing with different operators to come and operate my space.
Nitish Bhargava: You give me a one-track solution where you are able to take care of my requirement on a pan-India basis." That is why if you look at metrics like 1,000-plus seat of clients, multi-city revenue, existing client expansion, long tenures, all of these metrics have significantly increased for Smartworks because this is not a short-term trend. It is basically a cultural shift where Smartworks is offering at a price point which is significantly lower than even if they were to do it at their own. Even if the shift was to happen and things were to stabilize, the Smartworks price point is still so attractive that we will always be a more value-accretive option to any of these larger customers who are looking at expanding.
[Analyst] (DAM Capital): Got it. That is super clear. Thank you.
Operator: Thank you. The next question is from the line of Aditya Shah, an individual investor. Please proceed.
Aditya Shah: Hi, management. I would like to know that Keppel's around 15% stake, any chance that they would monetize any part of your holding in the near future? That is my first question.
Harsh Binani: Thank you for the question. Keppel has been a very long-term supporter of the company, and they invested in 2019. To clarify again, they did pare down a small stake from 19% to 15% during IPO. But since then, they continue to be very, very long-term partners, and they are not a typical private equity which is invested from its fund. It is a balance sheet money. So, they have significantly longer appetite to continue holding. To that extent, of course, they will be best positioned to answer around when they would like to monetize. But to the best of our understanding, they continue to be long-term, and there is no immediate monetization plans. Hope that clarifies.
Nitish Bhargava: Hopefully, the fact that we are delivering 35% growth year on year, start the factory for them to continue with us.
Aditya Shah: There are a couple of more questions. Why has there been a dip in the mature as well as total occupancy once the entire 13 to 17 million square feet becomes operational? Should we assume that the occupancy will go down in near future?
Nitish Bhargava: With more centers coming up, if we add a base and we add another million square foot in the next quarter itself, obviously, the occupancy for that particular quarter will go on because our lag, there is always a lag between when we make a center operational and by the time that center starts generating revenue. It takes us three to four months to build out the common amenities, and after that, the customer comes in, and by the time he actually moves into the space, there is a five to six-month lag. I think what is more relevant in this data is to see what our committed occupancies stand, both at the mature level as well as the center level. If you look at our committed occupancies, it stands at 86% for our overall portfolio and 91% for our mature centers.
Nitish Bhargava: Your committed occupancies will continue to be around these marks. The overall occupancy might differ from quarter to quarter depending on the kind of supply that is coming in. Because a few buildings got delayed probably in the first quarter and may get delayed in the next quarter, you might see occupancies, two, three buildings coming in together, and that is why some temporary shift in the occupancy numbers. But what is the more relevant number to look at is the committed occupancy, which from our side is going to be stable throughout the next few quarters because of the pre-sell that we have also got.
Harsh Binani: Aditya, we have actually put a very interesting perspective on slide 18 of our earnings deck, where we speak about the fact that today, of course, we are in our heaviest CapEx cycle, but the day our 13 million square foot fully matures, which will happen in the next few quarters, you can start to see the company being, A, free cash flow positive, and conversely, if you were to stop our growth then and just assume that we are only at 13 million square foot, at steady state, our margins are actually going to be amongst the highest because our cost base is so low and our operating leverage has kicked in so meaningfully that frankly, margin dilution is something which we do not worry about at all. It is in fact how quickly can we grow and ensure that these metrics do not taper down is where the focus is.
Aditya Shah: Okay. There are a couple of more questions, if you do not mind. Your ROCE has been constant for three quarters. Should we consider that it has peaked?
Nitish Bhargava: No, sir. What you should look at the ROCE is not only the ROCE number today. A significant portion of our CapEx is going towards expansion. Just to quantify, Harsh mentioned in his brief today that almost INR 200 crore of CapEx or spend, which is capitalized already, is towards centers which have not even started generating revenue. So our ROCE is expanding significantly. We have given a guidance that by 2028, you will see these ROCEs getting up to about 28%. ROCE is expanding at this pace despite of us growing at 35%, adding more than 45,000 seats in the next two quarters. We are fairly confident that the ROCEs will be stable. Yes, an uptake, you might not see a significant uptake because we are significantly spending on growth.
Nitish Bhargava: Once this growth kicks in and the percentage of growth becomes smaller, you will automatically see the ROCE numbers get better. So we are fairly confident that the FY28 guidance of ROCE reaching towards that 28% mark, we are well on track to get to that number.
Aditya Shah: Okay, thank you. That was helpful. Why is it blocking FY2029 building now and taking the cash?
Nitish Bhargava: Sure. Look, the raw material, which are great buildings in prime locations, are very scarce, whereas demand is not. The fact that we are able to source in a very visible format the supply for the next 3, 4 years speaks about the developer relationships and the model that we have created where developers now want to give their whole buildings on preferred terms to us. To that extent, it is also advantageous to us because not only are you getting preferred rates for something which is going to be available 2 years down the line, but you are getting that additional 2 years to market that demand. When we launch, we expect that the pre-sell will be even higher than what it is now. We had started to see this during COVID.
Nitish Bhargava: The market had started to contract, but we continued to take a lot of great supply, and a lot of those supply acquisitions have turned out to be very good bets because the rentals in those markets have meaningfully gone up, but the supply has not kept pace with the demand which is there. Also, our strategy of growth, because we do not do back-to-back deals, and it is not like we first find a customer and then find the space. Blocking in the right supply allows us to make sure that the value offering that we are giving to the customer across different locations is standardized and we are able to cater to their requirements.
Aditya Shah: Okay. My last one, if you guys do not mind. Cash conversion has been around 0.9x for 4 quarters. Can you split what the open centers generate from what is going into the new buildings?
Nitish Bhargava: I think it is already presented in slide 13 of our presentation. You would see that our new existing centers, it is above 1%, one is to one on the OCF to EBITDA metrics. It is the new centers, and you would appreciate that the new center take-ups are not small take-ups, right? We have already committed to more than 4.5 million square foot of space, which is not even going to hit in this financial year and might hit by mid of next financial year, in terms of our starting construction. But there is money that is getting blocked through our operating cash flows and that also.
Nitish Bhargava: But if you look at slide number 13, it should hopefully explain that our existing centers are actually one or above one, but the small drag is on the newer centers or the deposits and other expenses that we have to do for the newer centers, which are dragging it a little down.
Aditya Shah: Okay, that is it from my side. Thank you so much, team.
Operator: Thank you. Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Nitish Bhargava: I believe there is one more question pending, so maybe we can cover that quickly and then close it. I believe
Operator: Sure, sir. The last question is from the line of Rishith Shah from Axis Capital. Please proceed.
Rishith Shah: Yeah, hi. Thanks for the opportunity. Maybe you would have covered it earlier. Just a quick question. We highlighted the cost advantage that we have on the supply side. Just wanted your understanding. Sarab, what are the key reasons? Is it that we are tying up larger spaces, or maybe is it because we are tying up them early during the construction phase? Or would it be because we are doing more of non-institutional supply?
Nitish Bhargava: I think it is a mix of all three. It is not just limited to taking up just large spaces or committing early. I think it is a fact that, A, we are committing to the non-institutional, which is a mix, by the way, today, but to non-institutional and institutional landlords. The fact that we are coming and committing to large scale, where competition is fairly limited and you are able to negotiate more, and the fact that you are committing at a stage where the landlord feels more comfortable to give a certain number.
Nitish Bhargava: So on the sourcing strategy, a mix of all three allows us to get preferred terms, and you would see in some of the stations and some of the recent deals that we have signed, that these preferred terms are not only beneficial in the short term, but if you look at the overall long-term, 10 to 15-year journey, these turn out to be almost 25% to 30%, 40% lower than what most markets are. Also, with the full commitment coming in, with a lot of the non-institutional landlords, they are able to raise, whether it is debt or any other equity that they need to raise on the assets for them to complete these assets. So, our strategy to go after a mix of all three has allowed us to continuously source at preferred rates.
Nitish Bhargava: That sort of helps us mitigate and make sure that we are able to cater to the customers at a price point which is probably 25% to 30% lower than our closest competitor.
Rishith Shah: Great. Perfect. Since we already have supply tied up for the next one and a half, two years, do you see any, I mean, apart from the contractual escalations, do you see the, I mean, rate per square feet, whatever we are paying, increasing higher than that or within the 4% to 5% range is what we should look at?
Nitish Bhargava: 4% to 5% is already contracted for. In fact, our strategy, we track more than 300 buildings and get the top six, seven buildings every year that gives us the best returns. So, I think we are going to continue getting those preferred deals across markets. That contractual escalations of between 4% to 4.5% or 5% year on year is what you should expect. You will see that in our lines on the increase in rentals also. In our balance sheet, you will see in our reported numbers that the number rental increase is cumulatively to the total area increase also. So, it does not increase more than that.
Rishith Shah: Okay, perfect. So, no impact of any mix change that we can see. So, the general increase actually.
Nitish Bhargava: No. In fact, I think there is only one way to go up, which is that the cost will continue going down and the realizations will continue getting better because we have also mentioned in the prior calls, right, how as you go through cycles, right, like we have now finished two, three cycles in a few of our older campuses where the rentals in the market have meaningfully corrected. So, there are MTM opportunities also which will help us increase this going forward.
Rishith Shah: Sure. Thank you so much for the detail.
Nitish Bhargava: Thank you.
Rishith Shah: Thank you.
Operator: That was the last question.
Nitish Bhargava: Sure. I can start with the closing remarks. Thank you for the questions. Three things to leave you with. We delivered the H1 and raised our revenue guidance. The building that makes FY27 are being fitted out today in a market short of quality space with the contracts to fill them already being signed. Ratios that look soft this quarter have one cause, which is investment arriving before revenue. One cure, which is these campuses going live and billing starting. Thank you, and we look forward to speaking with you next quarter.
Operator: Thank you. On behalf of Smartworks Coworking Spaces Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.
