The Hindu Business Line : There’s a slowdown in large deals

Several IT majors have had client-specific issues. The industry growth as a whole may be slower. If it was 27-28 per cent last year, it may come down to 20-21 per cent this year. - MR N. KRISHNAKUMAR, CEO, MINDTREE

MR N. KRISHNAKUMAR, CEO, MINDTREE

K.Venkatasubramanian

Speaking to Mr Krishnakumar Natarajan, CEO, MindTree, his enormous clarity and insight into the current challenges faced by IT companies, especially mid-tier ones, become evident. In a candid interview with Business Line, he gives his views on the deal environment and how his company is gearing itself to overcome a rough macro environment to deliver sustainable growth.

Excerpts from the interview:

The last time we spoke, you had indicated that you would target small and medium banks as prospective first time outsourcers as they are immune from the credit crisis. But with smaller banks such as Indy Mac Bank and First Priority Bank going bust, how do you view the strategy now?

To be very honest I don’t think we have had a very large client segment there. What we are trying to do is look at small banks that cater to specific segments not impacted by the mortgage crisis. I think if you look at the common thread across both of them, their operations were in some way or the other related to mortgage or credit-crisis related business.

Luckily, till now we have had no such exposure even among mid-sized banks. If you look at the mid-sized banks now, they are looking at providing corporate banking services to a specific industry. For example, one of the banks that we work with specialises in lending and credit-related activities to hi-tech companies, wine companies, etc.

So you have to sort of make a choice as to which kind of banks are going to be ‘there and present’ and have to take bets.

It is more by chance rather than a plan that we have not been affected. But now we will be more cautious before going to banks that have only credit-related operations.

But BFSI is still the largest outsourcer and hence is the overall scenario worrisome?

The short term is going be more cautious. Several IT majors have had client-specific issues. The industry growth as a whole may be slower. If it was 27-28 per cent last year y-o-y, this year it may come down to 20-21 per cent. BFSI (Banking, Finance, Securities, and Insurance) being 40 per cent of the total business for the industry, even if there is a 10 per cent slowdown in growth, the net effect will be of 3-4 per cent.

There is caution even in the other sectors. They are not as forthcoming and optimistic as they were last year.

Do you think ERP rollout from big globalising clients in the US and Europe, to replicate their processes elsewhere, will favour tier 1 players with a global delivery model?

This year at least, the growth in Europe and Asia-Pacific (APAC) has been stronger than the US. Even among our major customers in these countries, there is rapid globalisation. Their expansion in APAC has been far more rapid. Obviously, it provides a growth opportunity for many of us. And I don’t think we are in anyway less distinguished from others as we have the capability, reference and credibility to prove that we have the strength to compete.

From our large customers who are spreading into APAC, we have gotten our share of the business. Luckily, we did expand quite early on into geographies such as Australia, Japan, Middle-East and India.

For the last 3-4 years, our y-o-y revenues from APAC have grown consistently.

Could you highlight the nature of your Indian engagements?

We really chose to be in a few segments and work with a few select companies. HUL, ICICI Bank, ING Vysya and Titan Industries are some of our major clients. Manufacturing, consumer products, automotives and BFSI are still the key segments that we focus on.

In the last year and a half, we have been active in government and defence segments. We have done a very large project for the Rajasthan Government for citizen services. We have also got approval from the defence sector as a Category ‘D’ service provider. We have done work for the Chief of Army Staff and the Deputy Chief of Army Staff. We are doing a complex consulting assignment, where assuming they have to manage the logistics of a war, what are the various systems and processes they need to adopt. The corresponding automation will be the next phase.

Is it because deal sizes and margins are small in India that Indian IT players view domestic deals as unattractive?

Certainly margins are improving, but the deal sizes are not that large when compared to those overseas. Even the Bharti deal is over a 10-year period and it involves every aspect from IT operations to back-end maintenance.

If there were a similar player (such as Bharti) in terms of size overseas, with so many million subscribers, the deal size would have easily been 3-4 times more.

How do you view the resurgence in large deals, such as Nielsen Company and BT deals?

Our frustration is that we never get called to such deals! But I think the large-deal flow has slowed down over the last six months. What we keep hearing is the same BT deals. Earlier, we used to hear about Deutsche Bank, ABN-AMRO, General Motors, etc. There used to be five such deals where Indian companies were involved. But in the last six months I have not seen or heard of any $300-400 milliondeals.

In such a situation what would be an appropriate client-mining strategy?

In specific areas, customers are realising that they can get better service from niche service providers rather than large ones. If in the services spectrum, there are 100 large customers who are already working with preferred providers, maybe a percentage of them may actually be looking at multi-sourcing as an option. It is here that mid-sized companies such as MindTree, which are able to bring in tremendous value in niche areas, can get an entry point to large customers.

How does the AztecSoft acquisition enhance your offerings?

It really dwells on the larger picture we see in the products development space. Increasingly, products are getting more and more complex. For example, the mobile phones are seeing more and more intelligence built into it.

So, in the light of increasing complexity, companies need to partner to build products to increase features and functionality and time-to-market.

In our R&D division, we have hardware design capabilities. AztecSoft had enterprise software capabilities, in the products space.

Together, we would now be able to address the entire value chain of the product development business.

Your comments on the Arcelor Mittal deal that you have won.

European companies are realising that they can no more stay away from outsourcing and offshoring. That was one of the key drivers of the Arcelor Mittal deal.

As a part of the integration of the two companies, they decided to change the IT model as well. They had chosen their western European IT organisation as the first test case.

It is right now a three years and eight months deal. The eight months are for the first phase of transition. Once it reaches a steady state, it is a three-year contract. The deal size is large and is shared between MindTree and Satyam. It is an ADM (application development and maintenance) services deal.

You have incurred significant forex losses this quarter…

It is a notional loss. Every one was expecting the rupee to appreciate continuously. To de-risk the business, we are hedged at 44 per cent of our revenues. The rupee started to depreciate and we had to bear the losses. Under AS-30, some of the instruments we had did not fully qualify as ‘hedges’ as they were not fully structured and the notional loss had to be taken to the P&L account. As some of these contracts unwind, those losses will be written back and so for the full financial year, we are confident that there will not be any impact.

As regards the pricing scenario, is a revision downwards expected?

We don’t see any pressure in terms of pricing. Thanks to the rupee appreciation, most of the IT companies were able to get good pricing increases last year. This year, however, customers will be wary. To get even a 3-4 per cent increase is going to be a tussle. But we have not had any instance of customers coming back to us for a downward pricing negotiation.

What is the likely wage hike range?

Expectation is muted compared to the 15-16 per cent hike levels last year. Clearly, a 10-12 per cent hike is more likely this time.

We realise that this is a difficult year, so we have plans for a hike only from October 1. We have pushed the cycle. Eventually it will be more 10 per cent levels.