Mindtree gets into act to shrug off lean phase

Mindtree Ltd, amidst reports about internal turbulence, is implementing a range of business and operational efficiency measures to shrug off its lean phase.

The mid-size IT services’ company delivered an extremely poor performance in 2QFY17, which according to analysts was “unquestionably its worst performance in many quarters.”

Mindtree, which began operations in 1999, is still a long way from its stated revenue target of $1 billion. It had earlier said it will reach the target by 2014-15 but now expects to do so during the next fiscal. As per analysts’ expectations, Mindtree is expected to reach revenues of about $800 million by FY17.

A spokesperson for Mindtree told BusinessLine that it is taking several measures such as better utilisation, lean initiatives, cost optimisation by reducing their sub-contractors and synergies in integration (of its recent acquisitions) to come out of its lean phase. “We remain confident that our investments are on the right track to accelerate growth for our clients,” the spokesperson said.

The spokesperson said the company’s business fundamentals are way too strong and hence can tide over any crisis. “We have great opportunities in front of us and we are focused on delivering consistent stakeholder satisfaction.”

However, Reliance Securities in a note to the investors said, “while results internals are visibly terrible, two factors, which we had outlined as concerns post poor 1QFY17 results – i.e. deep-rooted internal issues faced by its top 3-4 clients, and disheartening order book metrics (worsened further in 2QFY17) - persist.”

It further added that the management’s earlier expectation of recovery in 2HFY17 was grossly optimistic. Notably, order book worsened considerably from an already poor order book in 1QFY17, which further negates the optimism on revenue recovery.

Govind Agarwal, a research analyst with Prabhudas Lilladher, said margins for Mindtree have been the lowest since 2012 fiscal and will continue to be a concern in the short term.

But the company launched by former Wipro executives, including Subroto Bagchi and Ashok Soota, was quite clear that it was not worried by short-term blips. “We have seen significant growth in past few years - much faster than most of our industry peers. Our pipeline and market positioning continue to look strong in the medium-term, especially with our investments in Digital and Managed Services.”

On the poor second quarter results, it pointed out that it was primarily driven by the external factors and weakness in its UK-based subsidiary.

But analysts this paper spoke to said the company is witnessing pressure in deal renewals, while new opportunities are not materialising due to delayed decision-making at clients’ end owing to their internal challenges. However, because of the dynamic business environment, the outlook for Q3FY17, which forecasts flattish revenue, could change. The company said it was betting big on digital projects.

It pointed out that nearly every company that it is engaged with is continuing to invest heavily as a discretionary expense. “We are pleased to be a ‘born digital’ company that is viewed as a differentiated specialist in this area. Companies are investing in both run-the-business and grow-the-business initiatives and we have strong capabilities on both these sides. While we are born digital and have a strong pedigree on digital offerings, we are also transforming the traditional IT services.”

Mindtree’s shares ended the day at ₹456, which was nearly flat compared with the previous day’s closing.

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