Brexit to hit revenues, but Q1 is a safe period: Mastek

Sudhakar Ram, MD & Group CEO, Mastek in an interview to CNBC-TV18 says there could be negative growth in the year in rupee terms but not in constant currency terms.  He was talking about the fallout from the Brexit event.For the company, 95 percent of the revenues come from the UK; so, revenues will be impacted, says Ram adding that one rupee fall in the pound will affect revenues by one percent.  However, he does not see much impact in the first quarter; expect translation losses, he says.The impact of the currency will mainly be seen in the topline and not so much in the margins, assures Ram, adding that the company is comfortably hedged around 50-60 percent of futures revenues for the next few quarters. The company’s search for acquiring companies in USD 20-30 million range continues with nothing definite to report, says Ram.Below is the verbatim transcript of Sudhakar Ram's interview with Reema Tendulkar and Nigel D'Souza on CNBC-TV18. Reema: Can you quantify what is your total exposure to UK and what percentage of that comes in from the government because we understand these are high numbers? A: In fact Mastek is predominantly in the UK and almost 95 percent plus of our business comes from the UK. So, we will see an impact from a topline perspective almost when every Re 1 drop in the pound will have a one percent impact on our revenues and in terms of government we have been very strong in the government. With this Brexit move and David Cameron wanting to step down, we do see that decisions will start getting delayed as there will be pretty much of a hiatus in terms of new decision making in the government over the next 3-4 months. Nigel: Just wanted to focus on the second part of your answer, you said a lot of your revenue comes in via the government route so do you see any kind of growth slowdown maybe delay in decision making as well that could have a big impact on your business since most of it is coming in from the government? A: We do expect that there will be delays like I said because of the change in government decision making would pretty much take a halt now, there will be no new decisions will be taken still the new Prime Minister comes in place and the new government is formed. So we still have an impact on us from a growth perspective. Reema: Let me come back to the sensitivity analysis that you gave us. Re 1 fall versus the pound will affect your revenues by one percent. Already in a span of two trading days, we have seen the pound to rupee rate fall from 100 to 90. Should we understand that in Q1, your revenues could purely be impacted on account of currency to the tune of 10 percent? A: That is right and it will be pure translation losses because most of our businesses are in pounds. So overall as a business, it doesn’t impact us but when we translate it to rupees, definitely there is a serious impact. Nigel: What about the margins, could it get some kind of a hit because of this currency movement, the big fluctuation that we are seeing? A: Fortunately, given that a lot of our costs are onsite in pounds, the impact on the margin will be far more muted and we also have good hedges that we have taken in the past. So we don’t expect too much of an impact on margin. The main impact will be on topline. Reema: Apart from the currency translation losses, how is core business shaping up for you in Q1, what should we expect, the organic or a constant currency revenue growth to be for Mastek? A: We don’t give guidance. First quarter was per our own plans and except for the translation loss, we don’t see much of an impact in Q1. Going forward because of the government business, we will have to see how it pans out. That is yet to be determined, we will have it over the next few weeks. Reema: Let me do a follow-up on that. When we spoke to you post your Q4 earnings, you said that you are expecting a modest improvement in revenues in Q1. Do you still maintain that assessment because you are saying Q1 is going as per your plans organic constant currency revenue growth should be a modest number this time in Q1? A: I won't comment on it because we are pretty close to quarter-end but it was as per our internal plans. That is all I can share at the moment. Reema: You had also indicated that the company is perhaps looking at making an acquisition in the US, any progress on that? A: It is still in process, nothing major to report right now. There are candidates that we are looking at and in this year we do hope to make one acquisition of a decent size but meanwhile we have restarted our organic business in the US and we want to start building up a momentum, won't have much of an impact in this financial year but in the next financial year we want to see US again becoming a significant part of our revenues over the next three-four years. Nigel: Could you give us details of how soon could we hear about this acquisition and your cash balance is quite healthy it is close to around Rs 100 crore, how much of that are you looking to spend on this acquisition? A: We are looking at an acquisition in 20-30 million range. So a typical services companies are valued between 0.8 and 1.2 times. So it is in that ballpark. Reema: Can you update us on the company's current hedge positions, what will be the forex losses and gains on account of the currency volatility? A: We have been hedging 50-60 percent of our future revenues. I don’t have the hedge position off hand but we are comfortably hedged over the next few quarters. Reema: Do you think FY17 could be a year where the company\\'s revenues degrow on account of this whole Brexit uncertainty because it is clearly not going to be resolved anytime soon, so is it possible considering your high exposure to UK, majority of your revenues coming in from the government, FY17 could be a negative growth here for the company? A: In rupee terms, it is possible. We don’t know how much the drop in pound is going to continue but on a constant currency basis, I don’t think we will have a degrowth.