Mphasis does not see itself as an offshore company: CEO

Bangalore based IT services company Mphasis has seen a rally of 25 percent i the last one month.In an interview with CNBC-TV18, Ganesh Ayyar, CEO and ED, Mphasis, said that the company looks to move to the 13-15 percent margin band. He also said that they are focussing on deals with higher margins and is moving out of lower margin portfolios.Below is the transcript of Ganesh Ayyar’s interview with CNBC-TV18's Reema Tendulkar and Nigel D'Souza.Reema: Before we get chatting about the company\\'s fundamentals there is a cloud of uncertainty regarding the new visa bill which has been proposed. Take us through what impact will it have on the industry? A: It is not the first time such a thing has come about and most of the companies are very local. We don\\'t think of ourselves as offshore companies, you can see that we are participating heavily in social events, sporting events and employing lots of people within that country and such a bill has been in the offering for quite some time. So, let it happen and there was an overreaction yesterday.Reema: So, no margin hit according to you for the industry? A: The industry has shown over the last few years that time and again new changes happen and based on those changes we tweak and ultimately we deliver margins. Obviously does it mean completely the industry margin is going to get eroded, let it happen and then we will see. Nigel: I want to talk about your margins precisely because in the last quarter we saw that you had upped your margins, the street liked it very much and everybody was talking about the big gains that we had seen because that was one of the reasons. Now, you have upped your guidance, that was despite the fact that we are going to see wage hike this year. What are the margin levers? A: What I have done is I have shared that 12 to 14 percent band we will move to 13 to 15 percent. The way I look at the band is will I fall below that 12 percent range or will I fall below 13 percent range now. The probability of we falling below 13 percent range going forward is very low. So, it is not as if I have moved up the margin guidance. It is just that the downside has been capped and what we have done over the many months is we are looking at deals which are high margin, we are also looking at our business portfolio, we are moving out of lower margin portfolio. All that work has been done, those are the levers. We are pretty confident that the lower end we will be at 13 percent. Nigel: But is the upper end as well capped at 15 percent or do you think you will be going towards that level? A: Well, the moment I think I am going to breach 15 percent I will move the band again. Reema: But this protecting the margin at 13 percent at the lower end, is that only for the second half of the fiscal year or are you confident that from here on FY17-FY18 as you see things margins are not going to drop below 13 percent? A: That is the objective. Any CEO would like to see margin improving, growth accelerating. So, unless there are certain major hiccups I certainly want to maintain 13 to 15 and if we are able to do well move the guidance again but at this point of time from what I can see next two quarters we don't believe that it will fall below 13 percent. Reema: And FY17? A: FY17 our objective would be to still operate between 13-15 percent range. Reema: But would you say that at least for the Indian industry on an average 50 percent of its employees are L1, H1B visa? A: It varies from company to company. I can speak for my own company because there was such a bill being discussed about - was it two years ago - where they said they are going to give x number of years and it is going to result in increased visa fee and all that. Today it has come to a stage where it has become an integral part of our customers. So, anything that happens ultimately would be a collective move made by our customers and ourselves and we will do the right thing. There is no need to panic. Everybody is ready, everybody has been staring at it for the last three years and everybody is getting prepared.Nigel: I wanted to ask you because Infosys in their commentary said that they are seeing some follows in the banking client and in the last quarter you delivered a number of 9.9 percent or 10 percent odd. Are you seeing any kind of pressure coming in from banking clients? A: At this point of time we believe that we will have a nice consistent set of results. Q3 is typically soft for the industry simply because of holiday season. You will see some further lows and all that. So, to that extent we will be impacted but nothing which is unusual which is going to hit us. At least that is my belief. Reema: Coming back to the margin picture. Is there scope to improve your utilisation because it is already quite high. Is there scope to improve your utilisation, it is already quite high. Is that a lever that you are targeting? A: We are not targeting that lever at all because beyond certain percent it becomes counterproductive. We are happy with the level of utilisation that we have. Our margin levers are outside the utilisation lever if I may. Nigel: The last time we spoke as we you were sounding quite confident about your digital risk business. That has been a bit of drive at stand point. Well in the last few quarters at least how confident are you, second half of the year will it be good - I remember you saying that fourth quarter will be a little dull. What is your take on that? A: At this point of time I don\\'t have positive news on digital news that it is going to brighten up or whatever. It is definitely lot better than it was three quarters ago. As I mentioned that the line which I am drawing in digital risk is about USD 30 million run rate. It had dropped to USD 22 million run rate. On top of it we top it up with project business. So, that has kind of moved up from USD 22 to USD 30 million but the project business will take a little bit of hit in Q3-Q4, we don\\'t expect it to fall below USD 30 million because at one stage it had fallen USD 22 million. Nigel: Any more deal wins coming in from that segment? A: Absolutely. All our go to market is in good shape. Not just from that segment, even from out traditional Mphasis business we are focussing on some very nice deals especially in the space of digital and global risk & compliance (GRC), that is our focus area. We are also making some good moves in the infrastructure services side. So, I am quite bullish about those areas. Reema: What about HP? Revenues from HP have declined for 17 straight quarters now. That contract is coming up for renewal in February of 2016. Give us a sense of how the contract is likely to get renegotiated? A: We negotiate contracts with all the clients. In this case it happens to be our largest client called HP and it is coming up in February. We are already preparing for it. We are in discussion and at the end of the day the contract will settle into a win-win relationship. Unfortunately I don\\'t have 17 quarters of history to talk about in a positive way because our business has been declining. We are trying out different methods. Almost every second quarters we go back with a different approach to see whether that succeeds. We haven\\'t succeeded yet. The moment we succeed and that business starts stabilising obviously it will give us a boost. At this point of time I don\\'t have anything positive to report on HP. Reema: But post renegotiation of your contract with HP do you see the positivity that revenues would start, growth would come back for the HP business? A: 17 quarters if you take and extrapolate I don\\'t think that story would be the right story to tell. That is an attempt. As soon as we have a breakthrough hopefully it will stabilise and start the growth back. At this point of time I am not in a position to report that we have a breakthrough. Nigel: Talking about HP your revenues have come down to around 27 percent approximately. Can it go low, at least we have formed a base at around 27 percent of the revenues and also second question I want to ask. So much of speculation about price-to-earnings (PE) deal being done and the likes, is there anything happening on that front? A: First let me answer the HP question. It went to 27 percent for two reason. One, HP was declining and two, Direct was growing faster than the market. So, both factors played up. Now, if HP continues to decline and we continue to do well which I am confident about in Direct space then obviously the percent will drop. That is not a desirable state because I certainly want to see my largest client growing, as of now I don\\'t have a breakthrough. Now, the other part about discussion, first three years of my tenure I handled this issue that HP is going to buy the remaining 40 percent and last four years it has been that HP is going to sell. They are 60 percent. So, I have stopped commenting on that. Reema: After that they would talk about HP perhaps doing a buyback or the company doing a buyback. There have been so many rumours floating around for Mphasis. A: It is good for your business, those rumours. Because that keeps you at least talking about it. Nigel: But we want to know if there is anything happening you can always give us a couple of hints. A: These kind of discussions we can\\'t have it in the media. At this point of time all I will say is no comments. Reema: So, let us end the discussion on the Direct International business which is clearly what is driving growth for the company. You say it is going to grow better than the industry average 12-14 percent. How much better? A: Two vectors of better is what I look at. One is quantitative better, second is qualitative better. Qualitative better is going to bring sustenance and to me that is the bigger focus. You can see what is happening in the industry. Digital revolution is sweeping all the industry, not just IT services industry. So, we are focussed on digital and GRC. Last year out of new wins 64 percent of new wins came from digital and GRC. Now we have added infrastructure services which is modern infrastructure services. If you look at all that I hope to have 50 percent of my wins coming from those areas because what it would do it would actually strengthen the base for the company and that is my bigger focus rather than just the number game if I may because that is what is going to generate shareholder return on sustained basis.