IT services firm Mindtree reported strong growth numbers for Q1FY23, with the company seeing robust growth in revenue as well as strong margins. It reported sequential revenue growth of over 5 percent for the sixth straight quarter, and deal wins at an all-time high of $570 million. However, the talent war continues, with attrition at 24.5 percent and a net addition of a little over 2,300 people during the quarter.
Sectorally, retail and consumer markets were hit during the quarter, but both BFSI and travel verticals grew.
In an interview with Moneycontrol, Mindtree CEO Debashis Chatterjee shares why the company believes it can now participate in large deals, how the market is shaping up, trends in tech spending, and what the progress on Mindtree’s merger with L&T Infotech is. (L&T took a 61 percent stake in Mindtree in 2019.)
Edited excerpts:
It’s been a quarter of strong execution. Can you give us a sense of what signals you’re seeing in the market now? How’s the market shaping up for you based on the signals and signs you see now?
In terms of market sentiment, there are a lot of things that we are talking about at this point in time but we can’t pinpoint anything. We always look at the sentiments of our clients, the portfolio of clients we have, and what our clients believe in. From that perspective, this quarter also we have seen fairly broad-based growth barring RCM (retail, consumer packaged goods and manufacturing). If you look at RCM, it has degrown and some of that we had called out in the previous quarter, saying some projects are going to ramp down. We also saw significant currency headwinds, which is also a reason why we see that decline. But overall, on a year-on-year basis, RCM grew around 15.6 percent. So, it’s not that we did not grow.
ALSO READ: Mindtree Q1 results | Order book remains strong; cautiously optimistic, says CEO
Overall, the growth story for BFSI (banking, financial services and insurance) has been phenomenal, it grew 6.5 percent sequentially, CMT (communications, media and technology) has grown 5.9 percent sequentially and TTH (travel, transport and hospitality) has grown 11.2 percent sequentially. TTH has now crossed pre-pandemic levels and is growing extremely well. We still have a very good pipeline. The overall sentiment is fairly bullish.
There are a couple of clients, and these are instances of very, very client-specific softness in certain pockets within those clients, where some of the opportunities that we are working on were deferred. Deferment doesn’t mean that those opportunities will not come back. These are the clients who got impacted because of their exposure to Ukraine and Russia, as well as supply chain issues in China as the country went through lockdowns again, which were not anticipated.
Barring that, we have not seen anything where clients have changed their perspectives about how the full year will play out and that’s why we said we are very confident about what we see. As we progress through this quarter, we’ll also get perspectives from our clients just in case anything changes for them, but as of now, the overall pipeline is still very strong. We also know that it is not that every industry will fire all at the same time. We know overall growth is coming where one industry may not do well but others have more than compensated in terms of the overall growth of the company.
You mentioned a few clients’ specific issues—the retail CPG segment has shown weakness because of clients’ specific project ramp-downs. Do you see this continuing into the next quarter as well?
I think the expected ramp-down has already happened. We will probably see growth as we go along, but it’s difficult to call out beyond that at this point because we still feel that the clients are also looking at their plans in light of the macroeconomic conditions. Our job is to stay close to our clients and see if any sentiments are changing and if they do, factor them in as we go along.
One trend that we’ve observed is that the net employee addition in the June quarter has come down sequentially and year-on-year, despite the fact that attrition is shooting up. Companies are not even hiring that robustly to backfill. How should one read this?
At this point in time, considering attrition, we can’t think of anything else beyond ensuring that we have a healthy net addition. There has been a tremendous focus within the organisation in terms of getting a certain number of freshers into the system, getting them well trained, and ensuring that they can get billed to the client, that’s what we have been focusing on. I don’t think there is any other factor that we are worried about except the elevated attrition levels within the industry, not just us. We are not the only ones getting impacted because of that.
The last few months have seen huge layoffs among startups. Last year, the argument used to be that the talent war was happening between IT companies and startups. Now startups are the ones doing the laying off and the cutting back. Has the situation eased? Has salary inflation come down?
That will take some quarters to come down. Salaries have been a bit elevated in this industry. Everybody has gone through the same challenges. That’s why I said that attrition and salaries have to be addressed holistically. We feel that it should stabilise in a few quarters. As you rightly pointed out, we are seeing early signs. Whatever we are going through in the market right now is not a sustainable phenomenon. It has to stabilise at some point in time. At some point, attrition too should start coming down.
In terms of fresher hiring, how many people are you looking to hire per quarter and how much will freshers be part of your overall employee base?
Our overall employee base has crossed 37,400 across the globe. We have clearly called out that every quarter we are targeting to hire at least 1,500 freshers, and that’s what we are doing, and that’s what we have done in the last quarter as well. It’s not just hiring the freshers, but making sure that they can go through the induction, which is a combination of in-person and virtual initiatives, and ensuring that they can also get deployed in the right project with the right engagement.
In the last few years post-pandemic, mid-caps have seen a big boost not just in stock price but even in the kind of business they have got from clients. In the past, this has been attributed to the fact that they weren’t nimble enough to adapt and execute digital projects, new technologies and so on. But some analysts fear that the current environment could mean that large-caps stand to benefit more because more spends will go there, and the mid-caps might suffer as a result. Do you buy into this argument?
My argument is that there will be potentially large deals where we could not have participated in earlier given our size and scale, but can certainly participate in now. These are truly end-to-end transformational deals, which means that clients are looking at how you create efficiency and take out cost, how you take that dollar and reinvest it into the business to transform. The merged entity will give us an even better shot at those kinds of opportunities.
Every company has different business models, different capabilities, and different client portfolios. As far as we are concerned, we feel that the way we have defined our services, the way we are focusing in terms of providing end-to-end transformation, and leveraging digital for our clients, we are in a place where we can certainly compete with any other company, big or small.
In terms of the temporary blip in tech spending—do you think it will be soft for a few quarters? Also, in terms of projects, will clients now go in for cost-saving projects that will help keep the lights on, rather than discretionary ones?
We never knew that the pandemic would last for two years. Clients have tried to reimagine their business models because everybody realised that this pandemic is not something that can never happen again. Everybody has been trying to reimagine their business models. In order to do so, technology is the biggest bet.
That’s why we saw significant acceleration in cloud because it’s the fundamental foundation you have to have to drive transformation, at the front end as well as the back. This is a unique situation in which many of the clients have started the journey of transformation. After they’ve accelerated to the cloud, they have to look at transforming their front and back ends, align them to the new business model, do some core modulation, and align to the new business models they’re talking about.
That is why you see a lot of omnichannel, direct-to-consumer, contact layers… All these things have evolved during the last two years. And many clients are at various phases of their digital transformation journey. They’re not done with their transformation. If the clients do get into a situation in which they are struggling for dollars, they have to take some cost out and sustain the transformation journey they’d embarked upon. They can’t stop the journey. This could be a good opportunity for players who can play both on the transformation side and the cost-optimisation side. We are very confident that we can play in both areas. That also gives us an edge.
This is your sixth straight quarter above 5 percent sequential growth. Do you think this is sustainable, or do you anticipate any effects going forward?
We normally don’t give any guidance per se. What we have guided to is we want to have a philosophy of profitable growth in our company, which means that we will have growth, but we also need to be profitable. We’ve held our EBITDA (earnings before interest, tax, depreciation and amortisation) at a certain level and anything beyond that will be appropriately reinvested back into the business. Calling out a specific percentage is not ideal in terms of growth. But in my commentary on the last quarter, I said that the profitable growth story will continue pretty much into the first half. Our endeavour is to continue this even further, as we get into the next half. Of course, the merger announcement happened in between. The profitable growth story is our endeavour, and we are confident that it will continue as we go along.
What are you looking out for in the second half of this year?
The second half of the year has a lot of factors. We announced the merger on May 6, and we said that it takes six to nine months to close the merger with respect to regulatory approvals. At this point in time, we have received the NOC (no-objection certificate) from the stock exchange. We are awaiting regulatory approval. If it can happen before six to nine months, nothing like it. In the second half of the year, if everything goes well, it will be a merged entity that will be operating. That is something that I can talk about. As far as Mindtree is concerned, the profitable growth story is something that everybody has bought into within the organisation, right from the leadership. That should continue.
Regarding the merger itself, will you stick to current timelines? Are you worried that the merger might consume management bandwidth at a time when the market has become soft? Rather than spending time with clients and ensuring that you don’t lose momentum, this could take away some of that bandwidth. How are you handling that? What kind of cost savings and optimisation do you expect from the merged entity?
At this point, there’s a steering committee that is working in such a way that it doesn’t distract either organisation. That has been very well planned. That’s why you still see that Mindtree has been growing. We haven’t lost sight of the big picture. We’re focusing on profitable growth. In terms of synergy, every merger has a singular, primary objective. For this one, it is: how do you capture the market share by bringing the two companies together and continuing the journey of profitable growth?
If the profitable growth is industry-leading, that is what we should endeavour for. Keeping all of these things in mind, this merger is about creating more opportunities, getting more clients, getting more synergies, and doing more cross-selling and upselling into the client portfolios. Given the fact that there are hardly any overlapping clients, it’s a huge opportunity for us to cross-sell and upsell in the combined client portfolio. Having said that, a lot of cross-synergies will definitely come in. That’s the job of the steering committee, as they go through the integration plan. When the plan is ready and we are able to share it, we will certainly do so with everybody.
But there will be cross-synergies, which is natural. Both the entities have offices in the same cities. There will be opportunities for consolidating office space wherever both the firms are present. Such opportunities will always come up, but that’s not the primary driver. The primary driver is creating more synergies in the market, where we can create more revenue for ourselves.
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