Bangalore: In May, MindTree Ltd, a mid-size information technology (IT) services firm, acquired a majority stake in local rival Aztecsoft Ltd. The acquisition, the company’s fourth in as many years, will help the Bangalore-headquartered IT services firm offer product development work for global customers such as Microsoft Corp. In an interview, MindTree’s chief executive Krishnakumar Natarajan spoke on the company’s plans. Edited excerpts:
How has Aztecsoft’s acquisition helped MindTree?
Normally, companies want to keep the core intellectual property (IP) themselves and because they want to have more features, functionalities and bring their products into the market faster, they will work with specialist companies who are in the product engineering business.
Betting big: Natarajan sees India as a high potential market and expects revenue from the home market to grow to 7-8% in two years. Hemant Mishra/Mint
We clearly envision this business as fast growing, partly because of these drivers (and) we were present in one part of the business—mainly R&D (research and development) services—with the capability to design hardware, design a chip, make a board. With Aztecsoft, we are in the enterprise product design space—in the whole value chain.
The outsourced product development (OPD) market is promising, particularly for specialist companies. It also gives us the ability to cross-sell services—the same customers (of Aztecsoft) would look at IT services. Aztecsoft has around 80 customers that we can cross-sell services and all of them are target customers (for MindTree).
Are you saying that with this integration you are changing the DNA of the company, from an IT services firm to an OPD company?
We get a foothold in the OPD segment—we become a much larger player in the independent testing market. In some way, we look at ourselves providing IT services, but in segments of markets we will be specialists, than being just generalists.
Have you already started cross- selling services?
We have already started working with three customers and 12 opportunities. The integration (with Aztecsoft) is less than 12 weeks old, and we are already addressing opportunities that were not being seen by either companies.
Will your profit margins improve because you are cross-selling services?
The margins will improve by three major elements—pricing power, expanding reach and the brand you will build. I think we are still not there. Can we compare our pricing power with some of the larger players such as Infosys (Technologies Ltd)? I don’t think so.
The second element is to try and expand reach, (with) the same level on marketing, investment and infrastructure. This also gels with our strategy of not being everything to everyone. Focus on a few customers and mine deeply into those accounts, rather than work with hundreds of customers.
The third is to build operational excellence. In services business, unlike manufacturing, when we have people who are unbilled, that is a loss forever. We invested three years ago on an end-to-end system called Empower that gives us the billing, gross margins, financial parameters and the free talent available every month-end and it is online. We measure utilization tightly, not on number of people billed at the end of every month, but on billed hours divided by actual available hours.
And, are you happy with the utilization rate?
At 66%, it is still not as good. We are a growing company and we are adding projects and customers. For new projects, it is 43-45% and for projects that have matured it is 74%. We still feel that we can improve utilization by 4 percentage points and it will take two-three quarters, because some of the practices would have matured. Every percentage (point) of (improvement in) utilization contributes to half of percentage (point) on gross margins.
Would the current fluctuations in the (Indian) currency have an impact on your profit margins?
Obviously, it is challenging. What we have done is hedged only 44% of our receivables. Even if the rupee appreciates, it will not impact our bottom line, because 56% of the receivables is not hedged. We have not changed our guidance.
Your revenue from R&D services has come down (in the first quarter). Is there a shift in MindTree’s strategy?
It is very secular. Last quarter, one large customer in R&D services reduced spending, while in the IT services space, we had two (new) large customers. It grew 10-12% in first quarter over the previous quarter. This year, revenue from R&D services would be 25-26% (of total revenue). We do see a steady growth. But on the other hand, we are driving non-linear business, doing licensing deals for companies in the short-range wireless segment. It is the ability to help other product vendors to bring (to market) products faster. It drives service revenue—licensing is just 1%—it leverages 20-25% of our service revenue.
Have you increased your focus on the domestic market?
I see the domestic market as a high potential market. We will start addressing the defence and government in a much much bigger way. We are building jointly with CSIR (the government’s Council for Scientific and Industrial Research)—IP jointly owned —video surveillance equipment, which can be used for defence, and also commercially exploited.
Now the revenue is less than 5% from India, I do see it growing to 7-8% in two years.