The Hindu Business Line : Mastek keen to grow annuity businesses

THE Mastek Group has grown about 8.25 per cent for the year ended June 2004 as compared to the previous year. But, the last quarter growth seems more impressive - at close to 30 per cent. There have been some blips like this in the past too. We thought it was a good idea to meet Mr Sudhakar Ram, CEO, Mastek Ltd to do understand what has happened in the last few quarters and what awaits the company in time to come.

Interestingly, Mr Ram has a grouse against IT players who work for clients at throwaway prices. He says, "If we need to compete, we have to slash prices too. As a result not enough remains to invest in building capabilities for the future. In the long-term, that is detrimental to the industry as a whole." Excerpts from the interview:

Your work in Europe seems to have yielded more than in the US. Why is that?

For our kind of offering, it has been easier selling in the UK than in the US. Our UK clients have been more comfortable with letting a vendor orchestrate the whole outsourcing programme. In the US, clients tend to hold the reins tighter. That results in vendors becoming manpower suppliers. If you notice, there are very few mid-sized firms in the US. Whereas in the UK, there are no large IT teams stationed out there. You wouldn't find the equivalent of UK's Logica in the US. The IBMs dominate the space there.

In the last, at least, eight quarters, we notice that you added few clients each quarter. Specifically, your net addition (that factors in client losses) is sometimes five or lower. Do you see that changing for the better?

We don't add several customers every quarter. We believe this is not a business similar to retail where the number of customers matters. We want to work with good clients who would typically give us $10 million in billing per annum. If you see our share of an average client's IT budget, it would amount to 30 per cent in some cases. That's how closely we want to be involved.

How many such customers of this profile do you have now and what is the future outlook on this front?

We have about 30 such customers and we want to see that rise to between 70 and 100 in the next three years.

If you want revenues from a clutch of customers, then your sales and marketing expenses would come down.

Currently, it is rather high (nearly 35 per cent of revenues) and we would like to bring it down.

Your Q4 has been good compared to the rest of the previous year. But, how do you plan to bring consistency into revenues?

The projects business has typically been lumpy. To get over that, we have to switch more to annuity businesses (where there is a long-term project and there is a predictable annual revenue). Currently, 20 per cent of our revenues come from annuity businesses. We see that figure at 50 per cent over time. As annuity businesses step in, sales and marketing costs would go down too.

Does the phenomenon of IT buyers bringing down numbers of vendors affect a smaller player like Mastek?

If you look at mid-level clients, we are the sole vendor to some clients. That won't change unless we take away value instead of adding it.

You have recorded revenues in excess of Rs 400 crore for the year ended June 2004. What will you do to get to the next level?

We have to scale up. We are at the third wave of being offered and executing complex projects. The first wave was when our professionals were seen as good. The second is when offshore and scaling up on the offshore front were critical. UK's National Health Service order is an example of a complex project. Our chances of getting more of these large, complex projects of $10 million and above would improve as we scale up.

Would acquisitions be inevitable then?

We don't depend just on acquisitions. Partnership is the other way out. Our joint venture with Deloitte and sale of equity in our BPO venture to Capita are examples. They manage sales very well while we specialise in project management.

But doing this would only mean linear growth and nothing more dramatic.

Our strategy for growth is three-fold: Grow the current strategic accounts that we have built over the last few years into platinum accounts; grow through partnerships with large systems integrators and outsourcing companies, bidding jointly for large integration projects; and, add end-user accounts in select verticals like insurance that have the potential to grow large in the medium-term. We are looking at linear growth in the next year or two. We may look at major acquisitions beyond that.

Mastek has indicated that the effective tax rate would be between 10-12 per cent due to some impact from transfer pricing agreements with subsidiaries. Since this is higher now than it has been before, is there also an impact from some older units of yours that had been enjoying the benefits from Sec 10 A/B, but aren't eligible any more?

One of our units has completed its tax-free period. But the tax rate would keep changing since it depends on the ratio of our work onsite versus that offshore.

Manpower attrition is an issue for the industry. How do you tackle it?

It's in the high teens for us while it was less than 10 per cent two years ago. We see wage increases at about 15-16 per cent. We intend giving out more project-related incentives.