 "We are positive on Digital business, BFSI is a concern: MindTree CEO")
Mid-cap IT services firm Mindtree bets big on its digital solutions and strong deal pipeline to achieve higher revenue early next year. The Bengaluru-based company was an early starter in offering digital technology services – social media, mobility, analytics and cloud – compared with its larger peers in the industry. In an interview with Ayan Pramanik, Rostow Ravanan, CEO and Managing Director, shares his strategies to remain strong, despite uncertain macroeconomic environment and consistent pricing pressure.
Edited excerpts:
The company witnessed a decline in topline and net profit in Q2 on sequential basis. How do you plan to achieve higher revenues going forward?
One of the major reasons for it is that our deal pipeline is not closing faster. Because of the macroeconomic environment deals that should have been closed faster are getting delayed by 6-9 months on an average. The second reason is given the uncertainty in some of our clients’ business the amount of price compression for traditional services has been very strong, much higher than what we anticipated.
While we have had the existing portfolio suffering, new growth is not yet coming in. To be honest it will take one or two quarters for it to stabilize. It will remain for a while because some of our customers genuinely have their own business pressures, profitability challengers; all of them continuously looking at optimizing their costs.
Every enterprise has a greater demand from their IT teams at the moment, however they don’t have the budget, they squeeze money from on-the-business programmes and then use it for the investment for innovation. But on a fundamental proposition, we are strong. We are probably much better placed than the large players because they have so much on the run side of the business. For the bigger players to show growth commensurate to price reduction, they will need much larger wins and currently the market is not giving such big deals. So, given our size and capability, this trend suits us better.
When do you expect to see the ramp-up of Magnet360 acquisition happening. How will it improve your revenue?
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The Magnet360 acquisition has been an outstanding success. One of the most important piece was to get closer to Salesforce as an organization and Magnet was already an investee in Salesforce. For us to go along, I don’t think we can have all the solutions on our own. Financially it is growing fast, its profitability is better than what it was during the pre-acquisition period. Therefore, revenue synergies are running on schedule. The next obviously is the opportunity for customers. If you look at the way, we can cross-sell Mindtree services to their customers or vice-versa is phenomenal. We are taking it to Europe.
Operationally their margin today is much better than where they were before; from single digit EBITDA to double-digit EBITDA. But the only thing that has happened is we have set apart a certain amount of money as long-term incentives for the employees instead paying it to the shareholders; that from an accounting point of view the reported number gets as a little disappointed. Otherwise, in terms of operations, it has improved 3-4 percentage points post acquisition. The employee related expense will continue for one more year.
There has been a significant decline in technology spending by BFSI clients? Do you see the scenario improving soon?
I think we will need at least 3-4 quarters before that improves. For some strange reasons, we find BFSI is slowest adopter of new technologies, if you look at retail, airlines, hospitality and some of the other industries, they adopt digital or emerging technologies much holistically and started those journey much earlier. Today, in retail, we are participating in tens of millions of dollars’ opportunity for multi-year contracts for some of those transformational IT initiatives and they started proof of concepts (POC) projects early, now they are talking about big bets of transformation, BFSI is today talking about those POCs. It is also probably inevitable because the kind of regulation the industry goes through. But BFSI is one of those cases where the price pressure is very high and they are not making that much of big bets on the innovation front and therefore there is a bit of concern. Many of our customers are actually very paranoid because they see fintech (start-ups) coming and disrupting payments; they are anxious about the change but may be something is holding them back. I don’t see a happy ending for the BFSI story at least for the next 3-4 quarters. The only positive for us is our pipeline for opportunities is very strong even with new customers, volume growth is there but still be same services.
You seem to have missed the bus in revenue. When do expect to scale it?
By any means we have not missed the bus. One quarter something goes wrong should not be indicative that we have missed the bus. It is also reflection of the environment, if you look at the foundational aspect. But we realize that the external world believes in reported numbers and the underlying story sometimes takes time for it to reflect. But if you look at the long-term investors in Mindtree are absolutely convinced. In short-term basis, some analysts will have a negative reaction and I just have to take it in my stride.
Scaling is absolutely important because in our industry if you don’t grow you are dead. But undoubtedly our ability to grow is intact. Sales effort, marketing effort, domain knowledge any dimension you take we continuously keep evaluating it and we are confident that these things can turn very quickly. About 40% of our business comes through digital and it is one of the fastest growing. There is a lot of excitement because of a few things customers understand that Mindtree was born digital during the e-commerce boom and we have all the resources hence the foundation is very strong. The deal pipeline we see is probably the best in the last 6-7 years. What worries us is the speed at which the deals are moving, we are just waiting to see when the deals are expected to get closed. A multi-million dollar multi-year digital deal we have won in the last quarter.