Expect revenue to beat industry growth rate in FY16: Mindtree

IT services and solutions company Mindtree reported a mixed set numbers in its third quarter results where revenues increased by 3.9 percent to Rs 1214.5 crore but the margins fell by 83 basis points to 17.68 percent on a quarter-on-quarter basis.

In an interview with CNBC-TV18, Krishnakumar Natrajan, CEO and MD of Mindtree said the company has consciously sacrificed margins for growth in the last two years and he does not anticipate margins of 24-25 percent at which larger IT companies operate.

“We are confident of reporting double digit dollar revenue growth over the next 4-5 years,” he further said.

Guest editor at CNBC-TV18, Raamdeo Agrawal of Motilal Oswal said that he maintains a neutral look on the company and has kept a hold target of Rs 1600 and expects dollar revenue growth at a compound annual growth rate of 1.5 percent over FY15-18.Below is the verbatim transcript of Krishnakumar Natrajan’s interview with Anuj Singhal, Latha Venkatesh and Guest Editor Raamdeo Agrawal, on CNBC-TV18. Anuj: We were discussing topline growth, dollar revenue growth for IT companies and the kind of visibility we have on the topline growth in terms of dollar revenue growth. If you could tell us the kind of visibility you have for say next four or five years. A: I will just bring in some industry perspective and also talk about Mindtree. Like Raamdeo Agrawal rightly said, I think technology is becoming not just an enabler but becoming a competitive advantage for enterprises. So, the NASSCOM 2025 perspective report of which I was a part of, indicates that the industry can almost grow threefold by 2025. So, there is tremendous opportunity for companies. Driving this change is the focus towards digital transformation which is where Mindtree is really focused on. So, if I now zoom in to Mindtree, I do believe that over the next five years we have a great opportunity to consistently deliver at least a double digit dollar growth, consistently year after year. Latha: Your digital space itself I think is now contributing about 36 percent of your new orders. What is the visibility on that say in the next two years? Does it get well over 50 percent? A: You are right. If you look at the growth rates which we have had in digital, it has consistently outgrown the company average growth. FY15 the company grew about 15 percent, digital had a growth of almost 26 percent year-on-year (YoY) and for FY16 also the trend is pretty much growth in digital is far ahead of the company growth average. So, we do anticipate in the next two to three years, digital would be probably 50 percent of Mindtree’s revenues. Raamdeo: The margin scenario is not very good. The big ones have upwards of 25 percent, your company is extremely well respected and one of the contenders for big spot if ever another company makes it to the big league. So, in that situation, do you think when you grow, the margin will also grow or it will be at the cost of margin? A: You are right. What we have consistently done in the last year and a half was to invest to get a higher dollar growth. Particularly in areas like digital we have made significant investment and that is certainly come at the cost of margin. However, what we do believe is the scale plays in here. The difference in margins between the larger players and Mindtree would primarily be the difference of scale which is at the selling, general and administrative expense (SG&A) level. While we are at an SG&A level of about 20-21 percent, the larger companies are at 14-15 percent. As we scale up, the margin gap will sort of narrow down but I would not anticipate that we would be at the 25 percent margin levels, 24-25 percent which the larger players are at. Latha: Raamdeo’s question is whether you will sacrifice margins for more growth or whether margins will be sacrosanct? A: In the last two years I think we have consciously invested and sacrificed margin in the context of growth which is why both, FY15 and FY16, in FY15 we were and FY16 we are confident we will be significantly ahead of the industry growth rates. Going ahead I think we will watch the way in which the digital market really expands. If there is going to be I would say a rush to gain market share, we would certainly love or like to do that. We have already leadership in specific areas within the digital space. There we would certainly consolidate and try and use those levers to try and improve our margin profile also. Anuj: Just to carry that point forward, you made three or four acquisitions in the past, all related to digital and with quite a bit of investments. Are you done with that spree or could we see some more acquisitions over the next one or two years? A: We have been sort of in the context of expanding market where need to build capabilities and customers are critical. We have done four acquisitions which are in the digital space. Clearly the focus in the next 12 months is to assimilate this and ensure they drive both, synergy as well as establish our leadership in the digital space. So, going ahead, FY16 we would only look at critical assets. There are some gaps still but clearly it will not be at the pace at which we have done in FY16. FY17 certainly the pace of acquisitions will be much slower, the focus would be on assimilating these and ensuring they drive our leadership agenda. Raamdeo: You mentioned about 2025 NASSCOM estimate of about USD 400 billion which incidentally is little bigger than what Saudi Arabia’s oil export was when oil was at USD 100 per barrel. Their export was more like USD 325 billion and we are anticipating USD 400 billion of IT exports which is better than oil because it is well spread out. So, if that were to happen, you can imagine what will it do. However, from the current levels of about USD 100-110 billion kind of current situation we are talking about upwards of 13-14 percent compounded dollar growth which is very exciting number for 10 years and we have consolidated players amongst us. So, should one as an investor put bet on larger companies or should one look at midsized companies? Who has the better right to win in the future? A: I am a little biased player here but we do believe at Mindtree is that there is a space for what we call multi-segment specialist, people who focus on a few segments and have both the capability and the confidence to compete with the larger players and win business against them. So, that is one number at Mindtree we keep measuring all the time. The number of deals which you win against the larger player and how that ratio is moving. So, I would certainly think the market is large, the good part is it is growing and we anticipate that it will grow over the next 5-10 years, it will continue to grow. So, there is a great opportunity for focused players who can build world class capabilities and have the confidence to compete with the larger scale players. (Copy edited by Sidhartha Shukla, interview transcribed by Priyanka Deshpande)