Deal pipeline robust; see strong growth for FY17: Mindtree

Mindtree's fourth quarter earnings beat analysts' expectations on Monday with profit rising 3.4 percent sequentially to Rs 156 crore on revenue growth.Speaking on the company’s stellar performance, Krishnakumar Natarajan, Executive Chairman & Rostow Ravanan, CEO & MD, Mindtree are optimistic of strong growth for FY17 too.Ravanan said, "I think FY16 was a good year for Mindtree and many initiatives are in place to improve the profitability of the core Mindtree business for FY17 as well.”Ravanan is also very upbeat of deal pipeline going forward. The company he said had seen a 50 percent increase in the ticket size of digital deals at the end of FY16, as compared to the start of the financial year. "Very exciting opportunities in the pipeline where we are delivering some cutting edge kind of innovative projects for our clients and transformative work on some of the traditional services," he said.  The company, for FY17, would focus more on organic growth and integrating earlier aquisitions, said Ravanan.Below is the verbatim transcript of Krishnakumar Natarajan & Rostow Ravanan's interview with Ekta Batra on CNBC-TV18.Q: You had guided for only a moderate QoQ organic growth, yet the numbers look strong with a dollar revenue growth of 6 percent. Take us through that?Natarajan: The 6 percent quarter-on-quarters which we delivered includes the acquisition of Magnet 360 which we did during this quarter. On an organic basis growth was 3 percent and on constant currency 3.6 percent. When we gave the update to the market, we indicated that two segments, banks, financial services & insurance (BFSI) and retail consumer products are seeing softer demand early in the year and if you look at the result, both these segments have declined. BFSI declined by almost 5 percent and retail consumer products declined by about 3.6 percent. Also the update has to be viewed in the context that we gave a picture to the market when we declared the results of Q3, we would do better than our QoQ growth of 3.4 percent. Once we saw that due to the softness in these two segments we are not going to be able to be better, we thought it was prudent governance to update the market that it will be lower. So in a way if you look at the update which we gave was factual and in the context of what we saw in early March.Ravanan: While that comment was true for the mid-quarter update, I think we focus; our perspective was more on the fact that we delivered yet another year of very strong growth and the year was 22.5 percent growth. The quarter was a strong quarter. A combination of both, the softness in one or two verticals but the positives in the other verticals and other segments overshadowed the weakness in one or two segments and so the year was a great year and the quarter was great quarter for Mindtree.Q: The headwinds articulated by you, BFSI and retail and consumer packaged goods, are they behind now?Ravanan: The headwinds would likely last for another one or two quarters. It is client specific to few clients in both those segments and therefore we think it will take one or two couple of quarters before those challenges stabilise, but if you look at the full year FY17, we are confident that it will be another year of strong growth by Mindtree. However, over the last two or three years we have consistently delivered at least 15 percent growth. We expect FY17 to also be in the similar trajectory. There could be ups and downs between quarters where we see some quarters already strong and some quarters are muted but the year as a whole is likely to be strong for FY17 as well.Q: When you say pressure on BFSI, retail and CPG will persist for the next one to two quarters more, are we then likely to see a de-growth as we did this quarter? Ravanan: I think it is difficult to predict at the moment because like I said, a few clients are on a strong trajectory, some clients are experiencing some challenges in their own business. So, it is difficult to predict at this time. However, I think for the full year both those verticals will also deliver robust set of numbers. Q: Any other verticals where you foresee pressure? Ravanan: The other vertical, especially if you look at travel for example delivered very strong growth for the quarter, and for the full year FY16. So, the challenges are isolated to one or two clients in retail, CPG manufacturing and in BFSI. Q: Could you also take us through the reasons on why exactly margins declined quarter-on-quarter (QoQ) despite rupee depreciation?Ravanan: The rupee depreciated during the quarter and we got 60 basis points benefit because of the rupee depreciation. However, at a consolidated level, the main headwind was the lower margins of Bluefin and Magnet 360 which joined the Mindtree family during the course of this year and specifically some employee related incentive payments which from an accounting perspective gets accelerated and booked in the earlier parts of the cycle. So, some increased costs in the acquired business was the main reason for the decline in profitability. On an organic basis, I think FY16 was a good year for Mindtree and many initiatives are in place to improve the profitability of the core Mindtree business for FY17 as well. Q: Will lower margins of Magnet 360 and Bluefin impact margins in Q1 also and any other headwinds that we could expect? Ravanan: During the course of the year, there are plans in place to improve the efficiencies and profitability of both, Magnet 360 and Bluefin. Specifically for Q1, the main headwind we see is the US visa cost. This year we will probably incur something like USD 2 million on US visa cost. It will be lower than last year because we already have sufficient capacity and we get the benefits of having a larger onsite presence through the acquired entities in the US. So that leads to lower investments on visa cost. Our salary increases are effective July 1 so that impact will come in Q2.Q: FY16 margins in fact were significantly lower than FY15, what is the guidance on FY17 margins?Ravanan: We expect FY17 to be a slightly better margin profile compared to FY16 because the businesses in Bluefin and Magnet will improve profitability by a little bit. The organic Mindtree business will also improve its profitability in spite of the headwinds that we outlined earlier. Q: What are the current Bluefin and Magnet 360 margins and how much do you think you can in fact improve it by?Ravanan: Both of them are at single digit percentage points on EBITDA at the moment. However both I think by increasing off-shoring, by generating more revenue synergies, by implementing some cost synergy programmes both have the potential to improve.It is unlikely that there will be Mindtree level of profitability in the near term but definitely in the next 4 or 5 quarters they will get to better profitability than where they are at the moment.Q: Deal wins improved quarter on quarter. Is USD 280 million runrate sustainable according to you? Can you throw some colour on deal wins, order pipeline and how digital is also shaping up?Ravanan: We have a very strong pipeline. It has probably been amongst the best we have seen in the last few years both in terms of the size of individual opportunities including if you look at digital we have almost seen a 50 percent increase in the ticket size of digital deals at the end of FY16 compared to what we saw in the beginning of FY16.So, overall pipeline continues to be strong. Very exciting opportunities in the pipeline where we are delivering some cutting edge kind of innovative projects for our clients and transformative work on some of the traditional services. However the challenge is that we are seeing some delay or slowdown in decision making in a few segments. So, that is the sort of headwind but very happy with the pipeline that we have at the moment.Q: Is the delay in decision making you referred to only possibly in BFSI and retail CPG or is it also possibly percolating into other verticals?Ravanan: That will be predominantly in BFSI and retail.Q: Any new acquisitions which are lined up which we could expect?Ravanan: Not at the moment. We have done three acquisitions in the recent past. Priority will be to make sure that those get integrated to Mindtree as seamlessly as possible and we deliver the promises we made to ourselves when we completed these acquisitions to our people, to the customer base that we have and so on. If there is something really outstanding we will consider it but priority will be to focus on organic growth for FY17.