Mastek will focus on the acquisition of US-based companies: Arun Agarwal, Global CFO

Arun Agarwal, Global Chief Financial Officer (CFO), Mastek, talks about Q2FY22 numbers, margins, dollar revenue, dollar revenue, Evosys acquisition, acquisition plans, attrition and demand and growth scenario in different geographies among others during an interview with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: While going through your Q2FY22 numbers, we saw a slight pressure on the margins. What is the reason for it and going forward what trajectory is visible on the margins?

A: Margin is 21.1% in this quarter, which is 70 bps lower than the last quarter. The basic reason for it is that we made increments effective from July 1, 2021, across the board, all geographies and all the talent base due to which an impact of roughly 200 bps has occurred in the quarter. However, at the same time, we have worked on our margin levers, which are called operating levers including utilisation and other parameters which we manage internally to keep improving. And also, the leverage of fixed cost due to the growth is helping us to partially mitigate the impact of increment. So, increment led to an impact of 200 bps but it was reflected as a 70bps impact on a quarter-on-quarter basis due to upgrading levers and advantage because of the growth and the fixed cost

Q: What is the trajectory for margin improvement from here and what is the range or band in which margins will be present?

A: We are expecting the margin in the 21%+ range. Our endeavour for the current year is in line with the last year when we posted a 21% margin for the full year and. We believe that it is a good range for the current financial year but at the same time, we have to invest in the future as well. There is a good demand and the existing pipeline is quite robust, demand scenario is quite healthy and for this purpose, we will have to invest continuously in the business, whether you talk about sales, hunters and farmers. In the sales fraternity, you talk about building new capabilities or strengthening delivery engines, since growth expectations are much higher. Because of the demand scenario, you will have to design your bench, accordingly, and it is reflected in the attrition across the industry. There is a good demand and people are leaving at the same time. So, you can't hire and deliver at the just time and customers are not going to wait for longer, so you will have built your bench size, as well. We are endeavouring to maintain the current margin level while still driving for growth.

Q: Your dollar revenue has gone up only by 2.5% QoQ. What kind of opportunities are visible on the front and what can be the growth trajectory there?

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A: I would like to change it a bit because under dollar growth a significant portion of our business comes from the UK. So, when you see the dollar it is a GBPUSD, which has moved the other way round, so, I would like to request you to see it on a constant currency basis. Our growth stands at 3.9% QoQ and 25% YoY and on INR terms, the YoY growth is 30%+. So, our growth trajectory is continuing and we have posted consistent quarter-on-quarter growth in the last eight quarters and we endeavour to maintain the growth trajectory in the coming quarters as well.

Q: Your 12-month order backlog has fallen 2% QoQ to Rs 1154 crore. What is the reason for this fall and how is the deal pipeline looking going ahead?

A: Pipeline is quite strong as I have said earlier, however, slight slowness was seen in a few deals specifically NHS Healthcare. There are good deals in the pipeline. Last year, we have been selected in the framework of $800 million, where we together with other 11 partners are bidding for it. Good deals are appearing in the pipeline but their closure is expected in H2, of which some in the third quarter and more in the fourth quarter, which has led to some softness but if seen in the constant currency on a quarter-on-quarter basis then it will see that it is flat, however, in some de-growth is visible in INR because of the timing of GBP/INR and USD/INR conversion but demand environment is very-very strong. Good deals are in the pipeline in the range of $5 million to $30 million and we strive to convert them in the next coming quarters.

Q: Where the numbers are likely to will reach by year-end?

A: Unfortunately, we don't give guidance but we endeavour to continue quarter-on-quarter growth, which we have delivered in the last eight quarters. We believe momentum is there, the pipeline is good, customers are willing to buy digital services. In legacy services, we have not been there and 18-19% of business is cloud and digital transformation services, where demand is very very good. Now, we need to convert those demands into our order book and at the same time, build the right talent base to convert them into revenue. I think, that is the biggest challenge on which we are working on and we believe that we are right in that place to keep converting all these three levers to give you quarter-on-quarter growth, as we have given in the last eight quarters.

Q: You have talked about cloud and digital space that has huge growth opportunities along with competition and retaining clients is essential. As it is a very-very competitive field today and a lot of companies are coming up, which are offering these services at very low cost. How are you matching it and how big a threat is it for your business for the existing client base and what are the plans to mitigate it?

A: If you will have a look at Mastek's story, you will find that Mastek is very good in terms of managing the existing clients, which is reflected in our repeat business database that we share as part of our fact sheet. 75% plus are our repeat business, which again reinforces once we are in the account because of the hardcore capability, which we have in terms of solving customers business outcomes and it helps us in once we are in the account, we can manage. There is a competition, no doubt, but we believe that we are operating in our strength, very nimble approach, agile methodology, where we work with the customers, identify their business problem and then provide a solution, which can provide a faster solution to the customer. So, our approach with the customer has always helped us keep mining. So, I am not worried about the existing customer base perspective but more in terms of the new pipeline in which there will be some wins and some loose but making at 35-40% is what we are targeting if we continue winning and continue mining our existing relationship, I think, the growth will be given thereafter.

Q: - What's the latest update on the Evosys (an existing Oracle Platinum Partner) acquisition and what are your other acquisition plans going ahead? What could be the ticket size you are looking for?

A: In Evosys on September 15, 2021, we received the NCLT order that the demerger is complete. Now, we have 70% economic interest with us and a balance of 30% we will buy out over the next three years, starting the third quarter of the current financial year. Gradually, it will convert into 100% acquisition. In terms of M&A strategy, we are looking to acquire the asset and we are aggressively looking into the market. Our strategy is to look for an asset that is based in the US, at least 70-75% of business should be based in the US. In terms of capability, we are looking at data, analytics and BI because that is a growth lever for the next three years in the IT space. We are also open for the PaaS Platform, which would be Azure, WAS or any other hyperscalers. At the same time, any other asset which is CH-CI Space because we are known as a D2X service provider in the US, where we go and solve customer end-to-end problems more in terms of fund facing to acquire end-customer in the e-commerce platforms. This is our niche in the US market but getting more assets to augment those capabilities will also be our area of interest. So, ticket sizes - as there are multiple strategies which are going on - in the short to medium term any asset between $20 to 50 million will be of our interest. In terms of topline revenue, around 70-75% is coming from the US market.

Q: The attrition level of almost every IT company was quite high in this quarter and your attrition rate has jumped sharply by 4.6%. How will you stabilise it and what kind of attrition levels are visible in the future?

A: Very fair observation, as you have said that along with us other IT companies are also facing the same challenge of attrition. This is a reason for demand and supply mismatch. A lot of technology under digital transformation space is new and getting five-six years of skilled resources is always challenging and that is a reason that it is reflected in attrition. But, multiple ways are there to solve it and we have created a 7-point retention strategy between the leadership team in the last quarter. We are seeing some early signs of improvement because of that strategy of retention and it is not only salary retention strategy, it is how, you can take a person, an employee on a growth path of career-building, which is multi-fold. So, those retention strategy is working for us, some small loopholes have come but it is a longer step to be taken. At the same time, we are investing into fresher and talent pool in the process in the last nine months, we have made significant investments in the freshers' and have tied up with a lot of universities, both offshore and onshore, we bring talent into the classroom training and also provide them on-job training for further three months, which is helping us to build talent force at the same time. We believe that attrition will start coming down gradually but at the same time, you will have to invest in a talented workforce because the demand is good and to cater to that demand, you need to solve it from both lateral and fresher markets. So, we are working on this strategy.

Q: The UK and Europe contribute about 67% of revenue. What's the demand scenario there and are you also looking at any new geographies for further growth?

A: As you know that historically, we have been very strong in the UK, specifically in the UK public sector. In terms of expanding to other geographies, the US has been our important geography to grow further and that is a reason that we hired a US-based CEO, three months back, and the reason is simply that we should focus there and early indicator is that in this quarter is that we have grown by 25% in the US. So, the US growth is an early sign but we believe that the growth will continue in the US market. Europe is looking quite exciting at the moment though we are not there in all the countries of Europe, we believe that Nordic, France, the Netherlands are the exciting geographies. We have already won several deals in these geographies and our pipeline is also strengthening there. I believe that Europe will be our next growth story in over next two to three years in addition to the US and the UK.