A large portion – around 30 percent – of Mindtree's revenues comes from Europe and with the fall in the euro and experts anticipating a further weakening in the currency, the company may perhaps find itself in the eye of the storm.
But Rostow Ravanan, executive director and chief financial officer of Mindtree seems unperturbed by the developments on the cross-currency front. "I have decided never to make any forward predictions on the forex front," he says.
He says around 50 percent of net inflows of the company are hedged. For Mindtree, the geographical midst is different, he says. Even outside the US, a lot of the business is done in dollars, he adds. He says a percent change in the rupee-dollar rate has a 30-40 basis points impact.
In the next few quarters, he sees maximum opportunities coming from the US. Sounding extremely confident on the days to come, he says customer confidence is at its highest in the past 15 years.
He expects second quarter margins to be lower than the first quarter due to wages and visa cost.
Below is the verbatim transcript of Rostow Ravanan's interview with Reema Tendulkar and Sumaira Abidi on CNBC-TV18.
Reema: We have seen a near 7 percent decline in the euro versus the dollar just in the last four months. Also we have the Tata Consultancy Services (TCS) conference call yesterday where they indicated that they could see an 80 bps impact on the back of cross currency in the coming quarter that is in Q2. Can you tell us for Mindtree, what you anticipate will be the cross currency headwind in the quarter?
A: On currency, I have decided never to make any forward predictions. Let us wait till the end of the quarter. As you yourself outlined, there have been sharp moves both ways in the last few months. So let us wait till the end of the quarter to see what the impact of currency will turn out to be.
Our geographical mix is slightly different. Even within some of our customers outside of the US, we have dollar denominated contracts, which is why it makes it a little bit more difficult to predict how the quarter will turn out to be on cross currency impact.
Sumaira: Without asking you to make any forecast, as of now if you could tell us how much of your euro-revenues as well as your dollar-revenues are hedged, what is your current position like?
A: Usually our hedging policy hedges approximately 50 percent of our net inflows on a rolling three months basis. So this is a policy we adopted a few months ago. We follow that policy consistently. So I would say about half our international revenues are hedged on a net inflow basis, on a rolling three months.
Reema: Can you tell us what is the percentage of revenues that you get from the eurozone?
A: About 30 percent of our revenues come from Europe right now.
Reema: Can you tell us what the sensitivity would be like. So let us assume that there is another 10 percent movement in the euro, roughly what is the sensitivity, we have spoken about the sensitivity of the rupee on the margins, the way it moves, can you tell us for euro how it stands?
A: Usually, 1 percent change in the rupee/dollar rate is 35-40 bps impact to margin and the dollar is the largest currency for us from a revenue contract perspective. Euro and GBP are the second and the third largest but they are much smaller compared to the dollar. By far the majority of our revenues come in dollars.
Reema: Similarly can you give us a sensitivity to the one percent movement in euro as well? What can be the cross currency headwind?
A: Usually we don’t look at it that way because India doesn’t trade against any other currency except that dollar directly. So even if the rupee changes with respect to euro, it is always a rupee/dollar and dollar/euro determination. So therefore, the dollar/rupee fluctuation is the more relevant calculation for us.
Sumaira: IT is the place to be as far as dealwins are concerned, we have seen some real big ticket ones coming in for Infosys, Tech Mahindra, Wipro etc. With the kind of visibility that you have and you had a good Q1 as well as far as deal-wins are concerned, for this quarter and for FY15, can you tell us what kind of deal pipeline you have, what are you looking at?
A: I think our confidence in our deal pipeline has never been stronger. We are talking to a larger number of our customers on very exciting opportunities that they are implementing in their own businesses. They are choosing to partner with specialised players like Mindtree for those initiatives. So it has been amongst the best pipelines we have ever had in the history of Mindtree.
Reema: Will the order inflows in Q2 be better than what we saw in Q1 and if you can give us a number to what the deal pipeline looks like and how many deals are you currently chasing, some colour?
A: Unfortunately, we don’t disclose details on the pipeline but like I said it has been the most satisfying in terms of the customer confidence that we have ever had in the last fifteen years of Mindtree. So we are very positive, very bullish on the outlook for our business. Other than that I would say at this point in time we are not sharing any other details.
Sumaira: For the last few quarters, we have seen that US growth for you has been much stronger than Europe. Is that the trend that you expect to continue through the course of FY15 or do you see some more strength emerging in Europe?
A: Probably in the next one-two quarters, we definitely see US being a larger driver of our growth because more of our customer conversations with US based customers are where we are seeing maximum number of opportunities at this point of time.
Reema: In Q1, you had some pressure on your margins, what is the outlook looking like in constant currency on the margin front?
A: There will probably be a slight decline in Q2 compared to Q1 on the margin front. Like we explained when we announced Q1 results, Q1 had a small impact because of the US Visa filing cost. A little bit of that was made up because of operation efficiency like improvement in utilisation and so on and so forth. But Q2 will see the salary revision impact where approximately two-thirds of our people would get the salary increase affective from July 1. So that impact will hit us in Q2. So there could be a small margin decline in constant currency terms in Q2 compared to Q1.
We think we should be able to make up for that in the remaining part of this financial year because like I mentioned the growth momentum continues to be very strong. So therefore, we will be able to overcome that negative impact on margins in this quarter.
Reema: You have always indicated that hi-tech will rebound, things are looking up in the hi-tech vertical, any number in terms of the percentage growth that you would like to share?
A: I think it will be very strong growth. Last year, the hi-tech business had 5 percent growth. We have some new leadership in the team. We have also put in place a revised strategy for the hi-tech vertical. Both the team and the strategy is panning out extremely well. So this year is likely to be even stronger year than last year. Q1 was all time high growth for that business approximately 9 percent growth in that hi-tech vertical. So we expect to see a good performance by the hi-tech vertical in this quarter. We believe it has turned the corner in terms of the financial performance in that vertical.
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