Blackstone portfolio giving us strong growth avenues, says Mphasis CEO

If you look two years back, the portion of fixed price contracts has risen from 11% to around 25%, said Mphasis CEO Nitin Rakesh

As Nitin Rakesh, chief executive officer of IT services company Mphasis, is completing two years in the Blackstone-owned firm, he has set a clear roadmap to derisk the company's balance sheet with focus on new engines of growth. In a conversation with Debasis Mohapatra & Bibhu Ranjan Mishra, he says the Bengaluru-based firm is diversifying to newer verticals such as health care, transportation and logistics apart from expanding its presence in Europe. Edited excerpts:

How do you rate the journey so far?

Growth was obviously challenged (when I joined). These two years have been good because of the way the business has turned around. But, it's (still) work in progress with respect to transformation. As far as de-risking is concerned, we are doing multiple things like adding more clients through our direct sales channel. Blackstone’s portfolio is also our new engine of growth. So, we are upping our game by focusing on new areas, apart from growing in Europe and other key geographies.  

Traditionally, Mphasis has been heavy on BFSI (banking, financial services & insurance), with 65 per cent of revenue from this space. Is that changing?

Yes. We have started to see other verticals growing faster than BFSI. During the past quarter, emerging verticals contributed 25 per cent of our revenue. This constitutes health care, transportation & logistics, and manufacturing, which grew 35 per cent over a year and nine per cent sequentially.

In the December quarter, the banking and capital market vertical declined, despite insurance showing strong growth. Is slowing client spending or in-sourcing negatively impacting Mphasis?

That’s because of the Digital Risk (the company Mphasis had acquired in 2012) business, which declined double-digit in the December quarter. If you leave aside that side of the business, the banking business had also grown. That (Digital Risk) is the only business where we are seeing some growth challenges.

Why is Digital Risk a risk for you? How are you addressing it?

There are two elements to Digital Risk’s business. One is ongoing origination, repurchase of homes kind of process, where the volume was down as interest rates had gone up. It's a very cyclical business. The second part of the business is related to projects, where we do a lot of due-diligence for assessing risks before buying an asset. That is primarily a mortgage-backed business, where transactions were low due to volatility in the market during October-November. But, we have started seeing improvement in this business in the current quarter. Also, we have started integrating Digital Risk with our core business, so that we can cross-sale our other services to their clients.

However, the ratio of fixed price contracts seems to be declining (100 basis points down over a quarter), while the time and material (T&M) portion is increasing. Is this a healthy sign?

If you look two years back, the portion of fixed price contracts has risen from 11 per cent to around 25 per cent. Also, application development and management (ADM) services is now two-third of our business, where most of the client spending is happening. So, we are growing in the right areas and in the right direction.

The DXC/HP side of the business is growing at a health rate but will this be sustained in the long run?

There is a minimum revenue guarantee arrangement with HP for five years, which ends in 2021. Mphasis draws 29 per cent of revenue from the DXC/HP channel. But, we have developed deep relationships with the clients we have won through DXC. In fact, we received the best customer satisfaction award from DXC last year, testimony to our capabilities. We don't see any change in those relationships after the end of the revenue assurance arrangement. Also, we have added 10 clients from Blackstone’s portfolio, now contributing around five per cent of our total revenue. We are also looking at acquiring some entities (with enterprise valuation more than $25 million) through which we can build up our digital capabilities.