LTI-Mindtree merger plan ready, hope to complete integration in one or two quarters: Mindtree CEO Debashis Chatterjee

Mindtree CEO Debashis Chatterjee

Midcap IT company Mindtree beat estimates when its second-quarter net climbed 27.5 percent from a year earlier and 7.9 percent from the previous quarter.  However, this may be the last time that Mindtree reports earnings as a standalone entity. The merger with L&T Infotech, which was announced in May 2022, is set to be completed by the end of 2022.

Mindtree’s hiring was a little lower, keeping in mind the upcoming merger, Attrition is still elevated at 24.1 percent but has started to moderate.

In an interview with Moneycontrol’s Haripriya Suresh and Chandra R Srikanth, Mindtree CEO Debashis Chatterjee spoke about demand, the merger timeline and plans for the combined entity, and moonlighting. Edited excerpts:

Has there been a shift in the nature of deals due to macro conditions?

One of the things that we were anticipating was clients shifting their focus in terms of efficiency. Typically, the deals are about revenue maximisation for the client, which is transformation deals, which happened a lot in the last two years. But with some sentiments changing, clients have also been talking about efficiency deals, which are managed services.

Our order book in Q2 has both – there's a good mix of efficiency deals coming back. We are in a position to play on both sides, so that's a great positive.

There are certain specific clients where we had a bit of ramp down, which we called out the last two quarters. If you look at RCM [retail, consumer products and manufacturing], for example, though there is a decline in terms of reported currency, if you look at constant currency, it's a 2.9 percent growth. So, we are hoping that the worst is behind us.

Obviously, a significant portion of this decline is significant because our exposure to Europe is there in RCM and currency has played a big role as far as Europe is concerned. The story continues in CMT [communications, media and technology] as well. CMT was flat, but again, because of exposure in Europe.

In both technology and RCM, there are specific clients where there is a bit of softness in terms of decision-making because many of them are in the journey of transformation and various stages of the transformation. They cannot stop the transformation. But there is definitely a bit of delay in terms of moving to the next project, etc.. They are focusing on efficiency. That trend is clearly visible.

As we get into the second half, we're still waiting and watching because this is also the budgeting season for the clients. We must also give them a little time in terms of figuring out where they want to allocate dollars. But the pipeline is still strong. We are not too perturbed about again clocking industry-leading growth for the full fiscal.

You also have exposure to hi-tech. You count Microsoft as a key client and they have spoken about challenges. How will this segment be impacted?

Yes, we have our top clients in the same segment, but our top client is not necessarily only one client.

If you see the topline, we still have grown in Q2. We are looking at the situation very closely. As far as Q3 is concerned, it is a seasonally weak quarter for us because of furloughs, the number of working days, etc. But overall, as far as the tech clients are concerned, they are the ones who lead the innovation cycle. Probably there will be innovation which will be coming in more and more in that area. Even they are talking a little bit about pockets of slowdown. We feel that it is more temporary in nature and over a period, they will again think of the next level of innovation and that will also help in terms of creating opportunities for providers like us.

Has the pricing environment changed?

As far as the pricing is concerned, there is no change, it is stable. I would say in some of the transformational deals where we have to really look at niche capabilities, clients are willing to pay a premium… so pricing is fairly stable, I don't think there is any conversation to the contrary of what I said.

What is your visibility for H2FY23?

We must still wait and watch because there is a lot of uncertainty right now.

I won't generalise it across all sectors or all clients, but in pockets, we have seen that clients are delaying decisions in terms of getting to the next project. Probably they're waiting to look at the budget allocation and decide how much of that budget should go into transformation and how much of that should go into cost reduction. But whatever they do, we can play in both areas, it benefits us.

Some clients are also continuing to move ahead with their transformation agenda, where it is a great revenue opportunity for them.

I think clarity will emerge. But I would say that at this point, we are still working with the clients, working through the budget sessions, but at an overall fiscal level, if you look at the overall year for us, we still hold an industry-leading profitable growth story.

This is going to be a crucial quarter for you. It’s probably the last quarter when you report standalone earnings for Mindtree because of the merger with LTI. This is coming at a time when the macros are becoming challenging in the US, Europe and UK. How are you going to ensure that on the one hand you spend management bandwidth on the integration, but at the same time, you don't lose momentum? Big mergers, big integrations are always challenging.

Let me answer on a lighter note – there is no good time for deciding when the merger should happen because when we announced the merger, the thinking was that both the companies are doing very well, and the macros were looking good. Now, we are debating that the macros are not looking good, so why should we be merging now? There is no perfect time.

Ever since we announced the merger, we never lost focus in terms of our overall agenda of profitable growth. I'm sure LTI also did the same thing.

There is a separate team which is working in terms of the overall integration plan, the structures, etc. I can say that it's ready to be rolled out, but we cannot roll it out unless the legal approvals are all obtained in writing, which we expect very soon. That's what gives us the confidence that within this calendar year everything will be done.

Mergers can take a lot of time if you have not planned them well. But, given the fact that there was a steering committee formed and a few of the management from both sides were involved in terms of laying out the plans, our sincere wish is that we should get the merger activities done fairly soon within the next two quarters. By Q3 and Q4, we should be able to ensure that whatever is required with respect to the merger should be done, and we should be functioning as one single entity from the next fiscal.

From Q3, will the earnings be reported as one entity?

It will be, provided we get all the legal approvals on time. We are very hopeful, very optimistic that all those things should happen within this quarter.

Has the steering committee been able to identify the overlaps between businesses, what kind of corrections are needed and also a management structure for LTI-Mindtree?

The management structure is all decided and will be rolled out when we get the legal approvals.

The most attractive thing about this merger is that there is hardly any overlap. The overlap there is, it’s complementary in nature. For example, LTI is very strong in terms of supply chain transformation, and Mindtree is very strong in terms of customer experience transformation. If you look at the strengths, they can really be complementary to each other and will be only beneficial.

The other interesting thing is we will have access to 700-plus clients, and out of those clients, only a handful of 10 clients are common clients. Even within those common clients, both companies are working in different areas. I think from that perspective, it's very exciting.

Where we are trying to draw the synergies – this industry is all about how you manage your talent supply chain. We want to ensure that we look at the talent on both sides and try to derive the synergies across both the talent pools, and that's where I think we can do optimisation, where we can create synergies. This is just one example. There will be a lot of other corporate functions and areas where we want to ensure we can take the advantage of skill.

Culturally, how are you going to manage this integration?

We have already defined what LTI-Mindtree will stand for. That will be unveiled as soon as we get the approval. At a high level, both companies together will continue to remain customer-focussed, growth-hungry, and we don't want growth which is at the cost of profitability. The story of industry-leading profitable growth should continue even in the merged entity.

Otherwise, as an organisation, we are caring, we are always focused in terms of learning so that we can be future-ready. So all those aspects are common to both organisations and that should continue. I'm not too worried about cultural integration.

What do hiring plans look like going forward, since you said that you will be keeping an eye on the combined manpower of both companies?

The net intake was a little lower this quarter and last quarter, but that was consciously done keeping in mind that we have to look at the synergies across both the talent supply chains. But we have definitely not been delaying onboarding and all those things. I think clarity will emerge probably by the end of this quarter, but hiring will still go on.

What are your return to work plans?

We have already told people to come back to work because there is no solution where you can have people working remotely permanently. That is definitely not going to work. People are coming back to work. At least a third of our workforce is coming to work in a hybrid fashion and I think that will only increase as we go along.

Will you be looking at expanding in tier-two cities as well?

We have been consciously looking at what will benefit people. Getting into tier-two cities has to be planned well, but I think as a merged entity also we will keep continuing to go to tier-two cities rather than converging in one particular city and trying to outgrow that one city.

The buzzword this quarter is moonlighting, what are your views? Will you work on a policy where you will allow side gigs for certain projects?

I think the policy that we have is very clear: We don't encourage dual employment. We will never encourage dual employment and if anybody wants to do anything without taking prior approvals, that's a no-no.

Have there been instances of employees engaging in this?

There have been. It's not to call out large numbers, but wherever we have seen anything like that, we have already taken action.

Are you confident of the same double-digit growth, even after integration? Can give us a sense of what FY24 is going to look like for the merged entity?

You have to wait for a little while to see the unveiling of the larger entity. I can tell you right now that the industry-leading profitable growth has been an agenda for Mindtree and for LTI as well, and even in the combined entity, we will continue with that agenda.

I think the entire rationale for this merger is to make sure that we can create more opportunities in the market, for the organisation and for its stakeholders, its employees. That is the most exciting part because this merger is all about creating or grabbing more market share.