The Hindu Business Line : ‘Revival of Indian offshoring has begun’

“…everyone said that more captives would be created. We have seen the reverse happening. It makes sense to me. The captive is not saving anyone money.”

G.R.N. Somashekar

Ashok Soota

K. Bharat Kumar

I am privileged to have been given a third innings. I would like to make the most of it,” is the answer you get when you ask Ashok Soota what keeps him going well past the age at which most folks wish to retire.

Soota’s first ‘innings’, as he terms it, started in 1965 with the Shriram Group. Between 1984 and 1999, he was with Wipro, before starting MindTree with nine others.

Soota, Executive Chairman of MindTree Ltd, had a quick chat with eWorld last week when he talked about the slowdown, the prospects of the IT industry turning the corner and his ambitions for MindTree. Excerpts:

When the slowdown happened in 2000-01, the offshore boom took off in 2003. With hopes of economic growth returning globally, what do you foresee for Indian IT services?

One thing is for sure — the revival of Indian offshoring has clearly begun for all of us, but more so for the big companies.

On the other hand, have IT budgets across the world suddenly gone up? No. This means that the Indian story is playing out well. When the market revived, it revived faster here (in our context). So, you may say that the basic Indian story remains strong and firm.

The issue now is: how fast will we grow? Most large players grew 33 CAGR in a five-year period prior to this slowdown. The industry might have grown at 29 per cent. My personal belief is that the Indian industry has a larger base now. And, the recovery is not as strong as anybody is saying globally. The world is still not out of the woods.

It would take time. I expect industry growth rates to be 20 per cent minus (i.e. 20 per cent downwards), as distinct from being 30 per cent minus earlier. It could now be between 15 and 20 per cent.

You have talked of the Indian market… What is it with low margins here?

Look at the (huge) size of tenders. The arms of IT companies servicing the Indian market have been growing faster than their export arms. Government and telecom deals are pretty big.

As to margins, we would increasingly learn to make money after we have got the deal. Margins are certainly lower here, but so is the cost of selling. As deals get larger, the volume impact starts showing. It can be done without impacting manpower wages.

With your vision for achieving revenues of one billion dollars by 2014, you have articulated seven growth engines, with mobile wireless being the latest. Any others?

That’s enough. We have IT services, product engineering services and knowledge services and now the mobile arena.

Within IT, you have testing and remote infrastructure management and the like. That gives us more than enough. We now need to focus on each of these. Acquisitions would be required, but the inorganic engine only strengthens the organic engine.

The Kyocera Wireless acquisition, for example, may not be large but we will use the skills of the team to get larger business.

When you acquire a small entity, does due diligence take lesser time than that for a bigger target?

It is a pain to do small acquisitions since the effort to evaluate is the same, be it big or small. The difference when you acquire a captive unit is that there is one dimension less, since we don’t have to evaluate customers to see if they will stick around or not. There is only one customer for a captive. And, they give an indication right away as to what they intend to do.

So how come we are seeing a lot more sell-offs of captives?

That’s a puzzle — on the one side, everyone said that more captives would be created. We have seen the reverse happening. It makes sense to me. The captive is not saving anyone money.

Typically, a third-party vendor’s economies of scale are better. There are issues of providing employees a career path. Unless it’s really big, a captive cannot ensure a career path for all employees. (As a result), compensation costs are 10-15 per cent more.

Add to that, the economies of scale that a large third-party vendor can provide, besides lower attrition rates because of career paths. They have fixed overheads. A slowdown is the time when they question whether they need it as a fixed or a variable cost. The economics were always there.

Since we are in, or nearing the end of the slowdown, is this the right time to plan for future capacity expansion?

We should look out for it — so, when we turn the corner, we see an increase in capacity and hiring for the industry. (But the flip side is), the industry has been making campus commitments far too early. Sometimes 18 months ahead. You don’t know what your market will be 1.5 years down the line, but you have lined up people.

We would need physical capacity going forward. Had it not been for the slowdown, we would have created a presence in Bhubhaneswar by now. That has been delayed by 1.5-2 years.

As a philosophy, we haven’t laid off people. We paid a price for it, but we will reap the rewards as well. Our utilisation rates went down to as low as 60 per cent. When the revival comes, we will increase our utilisation levels.

You will see a bit of a lag between growth in revenue and hiring. Obviously, companies would want to make use of their existing bench strength before they go out to hire.

bharatk@thehindu.co.in

Related Stories:
MindTree net up 34% on forex gains
Optimistic note
Kyocera buy adds to MindTree portfolio
MindTree restructures operations, eyes buyouts