Q3 revenue growth highest in 5 years: Mindtree CEO

Bangalore based IT firm, Mindtree reported its third quarter results on Monday where the company outperformed street estimates and reported highest revenue growth in five years.

In an interview with CNBC-TV18, Krishnakumar Natarajan, MD and CEO of Mindtree said that all-round growth in every vertical resulted in such a great quarter.

However, the margins were impacted due to the Chennai floods, he added.

Newly appointed CEO, Rostow Ravanan expects EBITDA margin to be around 18-20 percent going forward. Commenting on the newly acquired entities he said that it will take around five quarters to improve profitability as they have low margins at present.Below is the verbatim transcript of Mindtree's  interview with Poornima Murali on CNBC-TV18.Q: Analysts said that in terms of revenue growth you’ve been surprising them but in terms of profitability, there is still much to do, so take us through the highlights and despite seasonality the topline was actually good, so take us through Q3. Natarajan: Clearly, like you said, in a seasonally weak quarter like Q3, on a standalone basis, our growth was 3.4 percent. On a constant currency, 4 percent. This has been the best growth for us in the last five years. 4 percent constant currency growth in Q3, what is certainly heartening is that we have managed the Chennai flood situation extremely well. We had the largest business continuity programme rolled out in terms of shifting of people, taking care of them with minimal disruption to customers. It just had a 0.1 percent impact on revenue. So, one reason for the strong growth is that we have managed an external event, extremely well. The second key reason is that in some of our segments, few client wins that we had, they ramped up very well, like our travel and hospitality grew 15.4 percent quarter-on-quarter which again was a strong growth. All our verticals grew. Banking, Financial services and Insurance (BFSI) grew, technology media and services grew, retail consumer products grew, so all segments grew very well. So, it is a very well rounded growth which has helped the strong growth momentum. All our geographies also did well. US did well, Europe which had a few soft quarters grew 4.6 percent on standalone basis. And amongst services clients, infrastructure management grew 9.4 percent. Digital continues a strong showing; on a standalone basis, digital grew nine percent quarter-on-quarter (Q-o-Q) and 27 percent year-on-year (Y-o-Y) So, overall, the strong growth is aided by a well-rounded growth. Now, coming to the question on margins, many times on margins, you take a very conscious position of building capacity based on how you see the demand funnel. You see that our utilisation has dropped about 2 percent, because we really have bill capacity in Q3. In the preparedness to deliver in Q4, that has impacted margins. Q3 also being seasonal quarter, the incremental leave which people take have been substantive , so when they are incurring the cost and the revenues are not coming in, it has an impact on margins. So, that is also impacted the margins. The Chennai floods, of course, it also has a cost limit, so that has also impacted margins. So, we are not concerned about the marginal drop in margins. I think these have been well thought through. It is a very conscious call of saying that we need to do this, because then the future clearly can be better. Q: Before I get to you on the new role, let me ask you on the margins front. Yesterday, in the conference call, you did say that Q4 will be better in terms of growth and margins, and also, you have an aspirational margin of 17-18 percent. How is FY17 panning out? Do you see any improvement on the margins front, improvement of 100-150 basis points going forwards? Ravanan: Absolutely. Our typical expected margin profile will probably be closer to the 18-20 percent at an earnings before interest, taxes, depreciation and amortisation (EBITDA) level, so aspirations are higher. KK obviously, set high standards for us and we all try our best to live up to his expectations. For Q3, the impact was also slightly higher because we acquired two entities during the course of this financial year. Both of whom are very exciting from a market place point of view, but currently have a lower margin profile and it will take us maybe four or five quarters to help improve their profitability and which obviously will then lead to higher profitability for Mindtree as well. Going forward for FY17, that is the same trajectory – deliver high growth, protect an grow margins because that is a function of efficiency, because if you grow without growing margins, it obviously indicates that you are not growing very efficiently. So, multiple initiatives to improve operational efficiency, improve client service efficiency and so on, so that how do we deliver high growth and also maintain margins. That is the focus. Q: You have been one of the key members for Mindtree’s journey and you have also set an ambitious target for 2020. Take us through Mindtree 2020 and your experience so far with the company. Bagchi: Mindtree 2020 is about building a company of substance and size, so clearly looking at a company that is a billion dollar plus league. The second important thing about Mindtree 2020 is to build a company which is deeply verticalised has deep capability in micro vertical areas where it is among the world’s best. The third important thing about Mindtree 2020 is to be what I call being locally local. That is in 20 parts of the world, people connected to Mindtree should have something nice to say about us. And last but not the least is to build leadership capacity that will then start thinking about 2025 and the reorganisation that we are doing is really keeping those four factors in mind.