Mindtree will focus on technology related to the healthcare segment: Vinit Teredesai, CFO

Vinit Teredesai, Chief Financial Officer, Mindtree, talks about the Q3FY22 numbers, revenue growth, Margin, TTH vertical, attrition level, client addition, deal pipeline, healthcare vertical and acquisition plans among others during an exclusive interview with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: Congratulations on the good set of numbers. What led to this kind of growth and please summarize the overall numbers?

A: If you will have a look at the numbers then communication, media technology has shown good growth in this quarter. Travel sector, where people was a bit afraid due to the Omicron, but I would like to tell your audience that till now our customers while talking to us have never mentioned that their business has been impacted. Whatever impact is there, was a short-oriented impact. They expect that by February-March, all their retail bookings and everything should come back to normal. Banking & Financial has been a weak sector till last year but this is the third quarter where we have shown a quarter-on-quarter growth in the segment. The retail consumer has been flattish a bit but their numbers were increased well in the first two quarters. You can say that there is a seasonal impact and the growth will return in the segment in the fourth quarter. So, if we will talk about industry sector-wise then there has been good growth in every industry. In terms of regions, North America, Europe and the Asia Pacific (although they are small) have grown well. So, there is an overall growth and there is no specific reason.

Q: The company’s constant currency revenue grew 5.2% and it was expected. What would be the outlook ahead for FY23 considering the demand? 

A: I can’t provide a specific outlook in numbers but we have said earlier that we are working with aspirations of industry-leading double-digit growth. The kind of pipeline and order book we have and the performance of the last nine months suggest that the momentum will continue just not in the next quarter but also in the next financial year 2022-23 (FY23) as the deal momentum and pipeline is quite strong on that platform. I feel, this impact of this double-digit industry-leading growth will continue in the future as well and growth will come from every industry verticals, while Europe’s percentage growth will be more because its base is small than the US but a good growth is visible even in the US.

Q: The majority of IT companies are reporting a flat margin this quarter due to wage hikes. But your margin has increased by 110 basis points to 19.2%. What factors contributed to this?

A: Two to three things led to this growth and they are

(i) Our fresher intake has increased significantly in the company and fresher adoption in certain segments like communication, media-technology, retail consumer and bank is performing well. We take freshers from the campus and train them for two to three months and then deploy them. After deployment, if the customer is ready to pay their money, then the period showcases that the freshers are getting absorbed quite well. This is a major reason. So, if attrition is happening then we are absorbing the freshers against the attrition that is happening.

(ii) If you will have a look at the sub-contractors – who are bought for a temporary phase where there is a short-term immediate requirement of the customer - we immediately plan on the ways to convert them into our employees or the employees can replace them.

These are the two major reasons that have benefited a lot in terms of margin. Before two years, we used to take 1,000-1,500 freshers annually. But if you will have a look at our intake now, then we are trying to take 1,000-1,500 freshers in every quarter. So, I can say that there has been an effect of pyramid balancing.

Q: Will this trajectory of margin will continue in the future as well and are you expecting that similar margins will be posted in the future as well or you can see some headwinds ahead?

A: Moving ahead, some headwinds will be there like the offices and travel will start, then it will have an effect. But we expect that we will be able to absorb most of the headwinds through our operational efficiency. Earlier as well while providing the guidance, we said that 20% plus EBITDA margin is sustainable. By investing in the kind of growth that is coming and absorbing these headwinds, 20% plus EBITDA margin is still a sustainable possibility.

Q: On verticals, RCM has shown a flat QoQ growth, while TTH grew by 7.4%. How are you seeing these verticals growing ahead in the next few quarters with specific commentary on TTH as Omicron spread is there as we speak?

A: As I have said, there are concerns related to Omicron but the concern is related to the directly impacted companies like airlines and the hotel industry. But in the last one and a half years, we have diversified our travel, transportation and hospitality (TTH) a lot and if you will look at it then demand is quite high in the car rental companies because people are taking their own rental car to travel instead of public transportation or aeroplanes. You can have a look at the cruise liners, we have acquired a lot of customers as well as in fleet management and real estate wholesale. So, due to this diversification of the travel and hospitality industry, I don’t think that there are any fears related to the Omicron. If there are some primary or temporary lockdowns are announced then it will not have a visible impact on our travel sector.

Q: We have seen attrition levels rising across IT companies, and it has been similar for your company as well. By when do you see this easing and what's your strategy to control it?

A: Attrition is a problem for the entire industry. People are changing jobs very quickly and salaries are quite attractive for people who are changing jobs. But this as an industry is not sustainable because if you change a job, it is not so that after six months someone will come to you and say that take a salary hike and change the job. This is a circle in which typically, you can change one to a maximum of two jobs in a year. So, it will be difficult to provide a timeline but our internal estimate suggests that things will stabilize in the next two to three quarters. As per forward-looking, if we look at the growth in attrition of the last six months then such attrition is not visible now. Plus, as I said, fresh intake is good, where loyalty, as well as productivity, is always at a much better scale. By doing these things, I feel attrition should start stabilising in the next two to three quarters.

Q: In terms of clients, there have been additions on a QoQ basis of which 3 are in $10 million and 1 in $20 million. Are we specifically focusing on this bracket going ahead?

A: It is so that if you look at our top customers, they are in a different league and its revenue contribution is around 25%. So, the customers after them have the ability to move from $25 million to $50 million capacity. So in that, the customers we have acquired in the last 12 months are scaling up well now and there has been growing there. Secondly, as I was talking about the travel sector where there was a slight dip in the revenue of certain customers after the pandemic have also returned to the $25 million to $50 million brackets. You are seeing a benefit of the same. The customers we have acquired now have the capability to scale up upto $25 million to $100 million capacity in the next two years. So, we are focusing on it as growth potential and margin potential is high in it.

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Q: Help us understand your deal pipeline for the next few quarters and from which verticals can we expect the maximum traction?

A: The pipeline is quite strong. I have said that the company that has defined their IT landscape properly or made a proper investment in it have revived quickly in this pandemic. So, every company is willing to make a good investment in their digital landscape so that there is a good improvement in the business. Gone are the days, when you would expect a customer to come to you and buy your products and services. Right now, the approach of the companies is such that they want to create an omnichannel experience, where you will have to take your products and services to your customers and provoke them to buy. If you will look at it then retail consumer packaging, media tech communication, media technology sectors are looking promising to us yet. We haven’t seen its complete potential to date and it seems promising. Banking financial services, where our position was weak till last year, we have made good entries in two to three big banks and if they will scale up then I feel that we can get growth from there as well.

Q: Healthcare vertical has shown good growth. What kind of growth opportunity do you foresee in the segment and what is your outlook for this segment?

A: Of course, the percentage is high there but its base is still small, so the growth is a bit high. But this is a very promising vertical. We are just differentiating between Healthcare and Lifesciences. We are not doing anything in Lifesciences at present and are just focusing on healthcare and in that too technology related, where you can talk about the smartwatches, where you have health facility or heart rate. As there is connectivity between the device to device and you have to use the technology in that. We are focusing on such a healthcare segment and are not focusing on generic healthcare. This area is quite promising and several big players have entered the segment, especially those who are not aware of the healthcare are entering the domain. I will just say that it is a very promising sector and I feel that we have entered the segment at the right time and its benefits will be seen in the next two years.

Q: In terms of the acquisition are you looking forward to any opportunity in small IT companies which are focusing on specialised solutions? Do you have an acquisition plan for FY23?

A: Acquisitions are there. Even our cash position is good. While doing an acquisition, we look at two to three selection criteria:

(i) If we get a good customer acquisition from it which can create a good revenue potential;

(ii) If there is any strengthening in the geographical presence, if we are not present in the country and with this acquisition, we can create a base there and talent is already available there and is used;

(iii) Capability if we are starting any new technology or initiative and if we are getting advantage of 2-3 years through this acquisition and we are not supposed to make any investment on these things.

If all these criteria are fulfilled, then we keep focusing on such acquisitions. In fact, we have a team that constantly looks forward to acquisition candidates. And, with the kind of cash position we have, we are ready for acquisition, if we get the right candidate at the right price.

Q: What can be the ticket size for these small IT companies?

A: It is not specific but we are looking forward to small to mid-sized IT companies in a category of 10-100 million if we get something in it.