All mid-size companies need digital transformation, now: Jagannathan Chakravarthi, Sonata Software

Jagannathan Chakravarthi, CFO, Sonata Software, talks about Q1FY22 numbers, opportunities in digital transformation, margins, demand, price hike plans and deal win among others during an interview with Mansee Dave, Zee Business. Edited Excerpts:

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Q: Revenue has shot up on a quarter-on-quarter basis. What led to this rise and what were the key revenue growth drivers in the quarter? Also, what is your view on the digital transformation opportunity and what is the $revenue growth status? 

A: As our CEO mentioned earlier, we are seeing quite a medium-term opportunity for all IT companies in digital transformation. This is not going to be one quarter or two-quarter kind of opportunity. This is the next 2–3-year opportunity for the entire IT industry. Last quarter, we had an impact of COVID on us as we were providing very high-end services and we could not completely replace the resources that were impacted with the new resources. But we will bounce back very strongly in the coming quarter. We believe that this opportunity is for particularly who will focus mainly on digital services, very very focused on cloud data and ERP services. We are expecting great growth in the next couple of years, not a couple of quarters. What we see this year, as our CEO had mentioned earlier is broadly the top-end growth will be there, which is the industry-leading growth, and we will continue to have industry-leading growth. The opportunity is plenty and the more we can fulfil the opportunity, the growth will continue to be there. Our profitability has always been good, and we are very confident of maintaining our good profitability in terms of industry-leading profit and industry-leading growth for this year also. This opportunity, we believe that it is for the entire IT industry is for the next couple of years. 

Q: We have seen a slight dip in the operating margin on a quarter-on-quarter basis. What led to this and what is your outlook here?

A: This dip, just I explained to you that COVID wave 2 had an impact for us because our resources were more kind of lateral and very high-end services, we couldn’t completely replace, we did our best to support with other people available and also people on contract, but we could not completely replace our existing employees on the project available role. Hence, we had an impact on this quarter but from the coming quarters, we go back to what growth level we showed in Q3 & Q4 of the last year. We will continue to post such kind of growth in the coming quarters. For the whole year, we have not changed the growth outlook as our CEO mentioned earlier, we are expecting industry-leading growth of high teens growth for the whole year. We are not changing the growth because we believe that the opportunity is plenty, the demand pipeline is very very strong, it is only a question of the supply chain side, on the demand side there is no issue at all. We have to address the supply side requirement and on the supply-side, we have taken care of which was affected because of the COVID, people joining was delayed, deferred, and a little bit of change has happened. With control on COVID, we believe that the next couple of quarters are going to be very good and we continue to maintain the same growth expectations for this year and the next few quarters will be good. 

Q: There has been a sharp surge in demand across all verticals. Have you undertaken any price hikes, and do you have any plans to hike the prices, further?

A: Before commenting on the pricing, definitely demand is fantastic at present across the globe, particularly in the essential retail, non-essential retail, utility services, manufacturing, ISPs (which has really been a good story for us, as we have done well there), the product engineering side of the services, customer experience services is really doing very well. ERP implementation is also doing really well for us both in the US and Australia. Europe has to improve a little bit more. Travel, we are keeping our fingers crossed, we have to wait and believe that the second half of the year travel will be better than the first half of the year. Once the vaccination happens and little bit more certainty on lockdown and other things come into the picture. In Europe, we believe the travel will bounce back in the second half expectation. Otherwise, the rest of all industry and all of our services, ERP, Data, customer experience services and geographies like the US and Australia are doing really well. The business momentum is very good and if we have to take care of the supply side and I think, the growth is already there. 

Q: Having said all of these, the price rise is expected in the future?

A: Price hike is one thing and we have to consider as the cost is going up as there is a lot of competition and there is a shortage in people as attrition is high for all companies and salary increases are coming and we are thinking of going back to the customers taking up the price but we will take that after due consideration and discussion with the customer without affecting the demand but I think there is hope for that. This year there is hope for that. 

Q: How has been the deal wins in this quarter and what's your outlook going ahead for the next 3-4 quarters?

A: We don’t disclose the quantum of deals, but a very very strong pipeline is there. What I want to say is that compared to last year first half, which was quite muted, while there was some improved second half of the last year it improved. This year it has been really good, in terms of the deal pipeline there have been continuous wins what we see now is that there is a very very strong pipeline growth. I believe that the pipeline growth will continue to happen for at least the next four to five quarters. Very very strong momentum in the demand is there. 

Q: If we talk about digital space and digital transformation, how many of your existing clients have requested you to move to the cloud journey? In how many years do you feel, it would be 100% as we see the pace of acceptance has accelerated post-pandemic?

A: Every customer now has accepted that digital transformation is essential. Our focus earlier was that of mid-sized companies. Particularly in the US, European and Australian markets, we were focusing on mid-sized companies. These companies have not been spending in the kind of spending what the fortune kind of companies was doing earlier. Now, all these companies have realized that this is a time for investments heavily in digital transformation. Apart from this, the moment of cloud has been completely accepted, now the norm that the transformation of the cloud for all the sizes of business has to happen. Plenty of opportunities are there in the cloud-related area and every company, even in India, if you see the India business, the entire product or value-added reselling business is completely transformed to cloud. Cloud transformation is across the globe, all level of businesses has accepted and plenty of opportunities are ahead for the IT industry. The digital transformation every company is investing in digital transformation even a small store one of the retailers in the US has told our CEO that he has spent 1 million in IT in 2020 and 10 million in-store expansions. If he would have flipped, he would have made triple time of revenue and that is the kind of realization people have got. So, the people have accepted that the pandemic impact is going to be for longer and it will take time and the consumption pattern and the services pattern of people in all kinds of services is going to change. So, the investment in digital transformation is very good and we see plenty of opportunities even in the mid-sized companies in all the geographies including India. There is a huge transformation for cloud adoption as well as digital transformation.