In an interview to CNBC-TV18, Rostow Ravanan, Co-Founder & CFO, Mindtree spoke about the impact of rupee depreciation on its IT business.
Given the fact that the rupee is weak, we will have a direct impact on inflation in the country which will put pressure on wages.
With the rupee's sharp depreciation, growth prospects for information technologies were viewed to be better than last quarter. Rostow Ravanan, co-founder and CEO of MindTree clarifies that although the weak rupee would mean better revenues, operational costs may also go up. The currency’s fall also puts pressure on wages in the country due to the inflationary pressure, he told CNBC-TV18.
He sees better overseas growth from US and Europe due to a good deal pipeline from these regions.
Below is the edited transcript of his interview to CNBC-TV18.
Q: How much of an upside impact will we see in terms of profit and loss account because of the rupee depreciation in Q2?
A: It is so difficult to predict. Typically a one percent change in the rupee will be approximately 0.4-0.5 percent to our operational profitability, but there are two things to keep in mind. One; we need to know the quarter average for this quarter as a whole and compare it with the quarter average for last quarter to understand the impact.
Second, the profitability is also quite sensitive to the last trade on September 30, because a lot of the asset related revaluations happen on closing rate on September 30.
We need to wait to see how the average for this quarter shapes up as well month end rate for September ends at.
Q: What is happening to pricing in your interaction with clients because that is one area of concern? Are the clients now talking about some leeway because the companies have currency advantage right now?
A: Very unlikely. We have not seen any pressure from any of our customers right now based on currency related price discussions. Typically, these would be taken up whenever the contract comes up for renewal and so far we have not seen any impact.
We don’t anticipate a major move on this front because the currency has been volatile while in the last few weeks it has been depreciating. If one looks back a little bit earlier in April and May the rupee was appreciating.
So, it can easily appreciate back again. That is one reason why we don’t think it will be a major impact on pricing.
Secondly, I think one point we are trying to communicate to clients is that many of us have hedged in the beginning of the year. In April, we had USD 150 worth of hedge at 57.22. So I am not going to get the full benefit of depreciation to 65-66 wherever it is today.
Thirdly, the biggest cost item for all the IT industry is people cost. Given the fact that the rupee is weak, we will have a direct impact on inflation in the country which will put pressure on wages.
Even from that angle, we don’t think all of us gained significantly on our long-term basis out of the currency depreciation. All of these things put together we don’t think we will make a major impact to pricing.
Q: What is your guidance on margins going into Q2? Whatever visibility that you have as well as possibly in the rest of the fiscal as well?
A: Our attempt is to look at it separately from an operational angle as well as currency angle. On the operational angle, we have some positives and negatives. The positives are the revenue growth we expect to see in this quarter.
The negatives are the new people addition as well as the salary revision will incur in this quarter. Our attempt is to try and minimize the impact of the negatives and probably try and keep margins stable from an operational side. Whatever comes because of currency it is separate.
Q: What about the deal pipeline? How is that looking?
A: I think it is looking very-very attractive. Our main markets are US and Western Europe. If one looks at the US markets across most vertical segments, there is a huge degree of confidence of our customers in their own businesses and therefore their spending on technology is definitely looking very strong. The pipeline is looking very healthy and exciting at this point of time.
Q: If you had to give us some guidance geographically, which one would be the biggest growth driver by volume as well as maybe pricing any sort of percent that you could share with us?
A: Pricing broadly remains stable. We are not seeing any major trends either upwards or downwards on pricing. The pricing environment is not very different between any of our markets.
On the volume side, clearly US will be the biggest boost for us. Most of our US-based customers are the ones where one has the maximum deal opportunity discussion now. Europe is a little mixed. Some customers are very positive; some customers are a little pessimistic.
So, the growth will be lead by US with Europe following. We don’t have a very big exposure to Asia so that is not like a big market for us. Our main markets are US and Europe. Europe is marginally lower than the growth we are seeing in US.
Q: We have seen two big deals happen in the merger and acquisition (M&A) space globally, the Vodafone and the Nokia deal; does that increase activity for the IT space? Could we see incremental amount of deals you could be possibly bidding for because of integration etc coming through?
A: Doubtful. In Mindtree, I am not able to see any immediate opportunities because telecom is not a very large market for us. Most of our business comes from manufacturing and financial services which are our two largest verticals so therefore difficult to comment on the impact of these two large mergers and acquisitons.
Mindtree stock price
On July 28, 2014, Mindtree closed at Rs 1054.10, up Rs 30.55, or 2.98 percent. The 52-week high of the share was Rs 1724.95 and the 52-week low was Rs 748.00.
The company's trailing 12-month (TTM) EPS was at Rs 53.25 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 19.8. The latest book value of the company is Rs 211.09 per share. At current value, the price-to-book value of the company is 4.99.
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